TaxTMI 
TaxTMI 
2013 (11) TMI 69
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....es of noble metals on titanium metal electrode/anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is 'manufacture' or 'production' of 'article' or 'thing' within the meaning of section 80-IA of the Income-tax Act, 1961 ? (ii) Whether the conclusion, drawn by the Income-tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not 'manufacturing' or 'producing' an 'article' or 'thing' within the meaning of section 80-IA(2) of the Income-tax Act, 1961, is erroneous being (a) Contrary to the mandatory provision of section 80-IA ; (b) Contrary to and inconsistent with the evidence on record ?" 2. The brief facts which have led to the present appeal are as follows : 2.1 The assessee applied to the Government of India through the Ministry of Industry, Department of Industrial Development, for a licence to set up a plant to manufacture coated metal electrodes at Kundaim industrial area in north Goa. The assessee was issued a licence on October 16, 1990. The assessee al....
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.... 3.1 It is pertinent to note that the assessee avers in the appeal that the claim for deduction under section 80-IA of the Income-tax Act was evidently reduced to a sum of Rs. 1,46,24,648 and, furthermore, the overall deduction under section 80-IA of the Income-tax Act would be limited to the gross total income under section 80A(2) of the Income-tax Act. 4. The Assessing Officer was evidently of the view that the deduction under section 80-IA of the Income-tax Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision. The assessee, however, on its part attempted to furnish an explanation, vide letters dated February 28, 1997, and March 7, 1997. 4.1 Briefly, the assessee attempted to explain that titanium substrates were received by it through UHDE as free issue material which, the assessee was required to coat with chemicals (noble metal oxide), as per the specifications contained in its agreement with the UHDE. For its efforts the assessee had received consideration, as stipulated in....
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....t the assessee did was to coat the said articles with noble metal oxides which, according to the Commissioner of Income-tax (Appeals), did not result in emergence of an entirely new commodity. 7. The assessee being aggrieved preferred an appeal to the Tribunal. The Tribunal sustained the view of the authorities below. 7.1 The thrust of the Tribunal's view appears to be that the expression used by the assessee in its agreement with UHDE to describe the articles received, i.e., titanium substrates (which, as noticed above, were free issue material supplied for the purposes of coating them with noble metal oxides) was a "misnomer". For this purpose, the Tribunal relied upon the observations set out in the Encyclopedia of Chemical Technology authored evidently by Kirk and Othmer (volume 15 at pages 172-183). 7.2 In other words, the Tribunal was of the view that what the assessee was receiving under its agreement with UHDE as free issue material was nothing but uncoated titanium metal anodes which on receipt were subjected to a process of coating by the assessee. In the opinion of the Tribunal the process of co....
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....ce of a new marketable commodity. It was contended, the fact that this article had been subjected to a process which resulted in manufacture, and that the manufactured article was marketable was apparent on perusal of the material placed on record, i.e., invoices, excise gate passes and the agreement entered into by it with UHDE as also the opinion of the experts. In support of his submissions the learned counsel relied upon the following : CIT v. Oracle Software India Ltd. [2010] 320 ITR 546 (SC) ; [2010] 2 SCC 677 ; Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309 (SC) ; [2008] 14 DTR (SC) 74 ; CIT v. Tamil Nadu Heat Treatment and Fetting Services P. Ltd. (No. 1) [1999] 238 ITR 529 (Mad) ; CIT v. Laxmi Art Studio [2001] 249 ITR 710 (Raj) and CIT v. Emptee Poly-Yarn P. Ltd. [2010] 320 ITR 665 (SC) ; [2010] 2 SCC 720". 9. As against this, Ms. Bansal largely relied upon the judgment of the Tribunal and the authorities below. In particular, Ms. Bansal stressed upon the fact that what the assessee had undertaken was job work and, in lieu thereof, the consideration received was nothing but job work charges. The learned counsel contended that the findings of fact returned by t....
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....945. There is no dispute raised before us with regard to production of invoices and the relevant gate passes before the Assessing Officer for scrutiny ; (v) in terms of the agreement arrived at between the assessee and UHDE the coated articles were sent to an entity by the name of Alpha for further fabrication to manufacture membrane cell elements ; (vi) the assessee had placed before the authorities below, a flow chart with respect to the process employed in converting the article received from UHDE into a finished product. For the sake of convenience the same is extracted hereinbelow : Flow chart of process of chemical activation Process Machinery/ equipment involved Inspection of titanium substrate Surface cleaning and degreasing Nylon brush and soap solution Stress relieving Electric furnace Pickling PVDF VAT with heaters Cleaning De-acidification Was....
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.... was supplied to the assessee was nothing but an uncoated anode. For the sake of convenience the passages are extracted herein below : "In response to the needs of the aerospace industry, an important technological breakthrough in the development of metal anodes took place in the 1950s when titanium became commercially available in large quantities. The excellent corrosion resistance of titanium in a variety of solutions and its self-oxidizing, valve-metal characteristic quickly were recognized to be of value for electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build up of non-corrodible oxide coatings on the surface, but with the addition of a non-corrodible metal coating, a useful anode can be produced. Extensive research work culminated in the filing of patents in 1957 in the Netherlands the U. K. (5-6) in 1958, which led to a group of patents (7-9) where oxides of noble metals are used in the coating of titanium, in particular, ruthenium oxide in combination with other metals and oxides. These precious metal oxide coatings have received worldwide acceptance in the chlo....
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....widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to take advantage of the high current densities attainable. For this reason, and because of more favourable economics, the DSA initially was first operated commercially in mercury cells. Anode structures were designed to replace graphite anodes and conversion could be completed without modification of the cells (see Alkali and chlorine products)." (emphasis is ours) 11.6. Prof. Dr. (Mrs.) K. Gadgil and Mr Sarkar of the I. I. T., Delhi while relying upon the said Encyclopedia opined as follows : "In manufacture of caustic soda-chlorine by electrolytic process, the positive terminal anode should have the property that it should facilitate liberation of chlorine and suppress production of oxygen from the aquous electrolyte (sodium chloride solution). This requires operations at a very low current density with high resistance to oxidation corrosion.  ....
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....s." (emphasis is ours) 11.7. A reading of the aforesaid opinion along with the extracts from the Encyclopedia quite clearly indicates that, according to the experts, titanium substrates is only used for the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare titanium is not an anode. 11.8. It is important to bear in mind that the Department did not produce any material by way of affidavit of any chemical analyst or an expert in chemical technology to counter the view of professor, Mr. Sarkar and Dr. (Mrs.) K. Gadgil. The authorities below had donned upon themselves the role of an expert by reading an extract in a manner which perhaps suited their conclusion. 11.9. In our view, such an approach is flawed ; while sitting as an adjudicator, courts have to base at times, their decision ; on material produced before it on an issue which requires expert input-therefore, its decision not to accept material placed before it should ordinarily also be based on a similarly persuasive evidence, unless the material placed before it is completely unreliable. As noted above, the Department did not adduce any evidence in support of its contention, which was co....
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....xtracted hereinbelow : "16. The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. The duty is levied on goods. As the Act does not define goods, the Legislature must be taken to have used that word in its ordinary dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in Union of India v. Delhi Cloth and General Mills Co. Ltd. [1963] Supp 1 SCR 586 . . . ." 12.4 The second being : A. P. State Electricity Board v. Collector of Central Excise [1994] 2 SCC 428. In this case, once again the Supreme Court was called upon to adjudicate as to whether pre-stressed cement concrete poles manufactured by the Andhra Pradesh State Electricity Board (APSEB) were goods within the meaning of section 3 of the Central Excises and Salt Act, 19....
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....available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant's own case before the excise authorities and the CEGAT was that these poles are manufactured by independent contractors from whom it purchased them. This plea itself-though not pressed before us-is adequate to demolish the case of the appellant." (emphasis is ours) 13. As in the Central Excises and Salt Act, 1944, in the Income-tax Act there is no definition of the word "manufacture". The expression "industrial undertaking", however, has been defined, inter alia in the Explanation to section 33B of the Income-tax Act as any undertaking which is mainly engaged in the manufacture ....
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....dered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry. 14.2 The Tribunal's conclusion ; that the coated titanium substrates did not result in production of a distinct new article, based on the provisions of the agreement arrived at by the assessee with the UHDE which, required it to dispatch the processed titanium substrates to Alpha for further fabrication to manufacture membrane cell element is, in our view, flawed. The reason for this is : the Tribunal had to address the issue as to whether the process employed by the assessee resulted in manufacture of a distinct new article. If it did, it mattered little that the said product could be further worked upon to manufacture membrane cell element. This line of inquiry and the resultant conclusion, without relevant material to support it : was, according to us, misdirected. In our opinion, the Tribunal employed the wrong test. Once the Tribunal found as a fact that the process undertaken by the assessee resulted in production of a "useful commercial commodity" the enquiry had to end there, and the assessee's claim allowed. 15. The judgment ci....