TaxTMI 
TaxTMI 
2026 (2) TMI 1238
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..../s 80-IC of the Act in respect of the profits derived by its Uttarakhand Unit (in short 'UTK Unit'). The facts in brief are that, the assessee is engaged in the business of manufacture of engine cooling systems, having its principal manufacturing unit at Chennai. The major customers of the assessee are Tata Motors and Ashok Leyland. In FY 2010-11, the assessee had set-up additional manufacturing and assembly unit in a notified area of Uttarakhand pursuant to Investment Subsidy Scheme bearing No. 1(10)/2001-NER dated 01.08.2003 read with Excise Notification No. 50/2003 dated 10.06.2003. It was brought to our notice that, the UTK facility was established to cater to the requirements of complete cooling systems of Ashok Leyland, who had also set up a new truck manufacturing unit in Uttarakhand. The assessee procured the principal items viz., radiator and inter-cooler from its Chennai Unit and all other parts were procured locally and thereafter processed and assembled at the UTK Unit, and the complete engine cooling system module was supplied to Ashok Leyland. According to the assessee, the UTK manufacturing unit qualified as an 'eligible unit' u/s 80-IC of the Act. Accordingly, separ....
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.... of the view that, the assessee had split up its manufacturing process whereby the core manufacturing process of radiators and inter coolers was undertaken at Chennai plant and that the UTK Unit was only assembling and fitting these components along with other parts in a frame to form a module. The AO observed that, the final product i.e. the complete cooling systems supplied to Ashok Leyland at Uttarkhand was being manufactured and supplied by the Chennai Plant to Ashok Leyland at Chennai as well. The AO observed that, the product was the same and customer was the same and that, only splitting was done due to location of the consumer manufacturing facility. The AO observed that the vital test of 'splitting-up of business' is that whether there was any addition to the existing capacity of the assessee, by putting up new unit. According to AO, the manufacturing capacity did not increase due to the UTK Unit and therefore the assessee was formed by splitting up of the existing business at the Chennai Unit. The AO further observed that, the UTK Unit was not undertaking any 'manufacture' as its input and output remained the same and therefore, the assembly process cannot be termed as 'm....
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.... material and the end product remains the same. 'Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the things produced is by itself a commercially different commodity whereas in the case of processing, it is not necessary to produce a commercially different article. These facts are not attested to by the process undertaken by the appellant. The appellant contention that it had got Central Excise Department Registration Certificate as a manufacturing unit cannot be considered as the criteria adopted by the Excise Department to declare a manufacturing is different from the criteria as mention in Income Tax Act. Further, Section 2(29BA) of the Act does not apply to the appellant. Hence, the Ld. AO's finding that the appellant had not undertaken manufacturing is found to be correct and the findings is sustained." 7. Being aggrieved by the above order....
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....ass-through unit, as being alleged by lower authorities, but was actually manufacturing a distinct product. It was brought to our notice that, the value of goods procured from Chennai plant was in the range of Rs. 5800/- (approx.) whereas the value-added cost incurred by the UTK Unit locally was Rs. 3000/- (approx.) which was 35% to 40% of the total cost. He thus submitted that, the UTK Unit was indeed engaged in manufacture and thus qualified for deduction u/s 80-IC of the Act. 10. Addressing the allegation that the UTK Unit was formed by splitting up of existing business, the Ld. AR submitted that, it was a case of expansion of business and not splitting up. The Ld. AR demonstrated through the details of quantities manufactured by Chennai & UTK Units that, there was an increase in the overall capacity of the assessee. The Ld. AR explained to us that, when Ashok Leyland had established a new unit in Uttarakhand, the assessee was required to augment its capacity to service both Ashok Leyland Chennai & Uttarakhand. He submitted that, it is a universal commercial practice that component manufacturers (Tier- I,II vendors) set up satellite units near the Original Equipment Manufactu....
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....rt in the case of Textile Machinery Corporation Ltd. vs CIT (107 ITR 195) was squarely applicable to the present case. 12. We have heard the rival submissions of the parties and perused the relevant materials on record. It is not in dispute that, the assessee had set up a new unit in the backward area of Uttarakhand, prior to 01.04.2012 and therefore such unit qualified as an eligible unit for the purposes of Section 80-IC of the Act. The question before us however is whether the assessee had fulfilled the conditions precedent in Section 80- IC(2) of the Act so as to claim deduction in respect of the profits derived by their UTK Unit. The lower authorities have observed that, Section 80- IC(2)(a) of the Act provides that, it applies to an undertaking which begins to 'manufacture' or 'produce' any article or thing. According to the lower authorities, the UTK Unit set up by the assessee was not engaged in 'manufacture or production of any article or thing' because the input and output product remained the same. Even the Ld. DR before us has claimed that, the UTK Unit was essentially a packing of convenience unit and was not engaged in manufacturing. From the facts placed before us....
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....sembled at the UTK unit and each stage of processing at UTK, the final integrated module could not exist. It is also noted that, the final product i.e. the complete engine cooling system is not a radiator or an inter-cooler and therefore in our considered view, the lower authorities were unjustified in holding that the input and output remained the same at the UTK Unit. 14. We also note that, the main components, viz. radiator and inter cooler are functionally different than an integrated engine cooling system module. Merely because, all these three products in themselves are essential heat exchangers in vehicles, it is observed that they serve different purposes. It was pointed out to us that functionally, a radiator cools the engine to prevent over-heating, and an inter cooler compresses the hot intake air to improve engine performance, whereas an integrated cooling system combines all these functions often using water to air systems for more efficient and compact cooling. According to us therefore, not only the contents of these products were different and distinct but their commercial use and application was also independent from each other and therefore, the activity being ....
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...., manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but Instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where....
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.... mineral ore Mineral ore is not excluded by the Eleventh Schedule. The only question is whether such business is one of manufacture or production of ore. The issue had arisen before different High Courts over a period of time. The High Courts have held that the activity amounted to 'production' and answered the issue in question in favour of the assessee. The High Court of Andhra Pradesh did so in CIT v. Singareni Collieries Co. Ltd. [1996] 221 ITR 48, the Calcutta High Court in Khalsa Brothers v. CIT [1996] 217 ITR 185 and CIT v. Mercantile Construction Co. [1994] 74 Taxman 41 (Cal.) and the Delhi High Court in CIT v. Univmin Ltd. [1993] 202 ITR 825. The Revenue has not questioned any of these decisions, at least not successfully, and the position of law. therefore, was taken as settled. The reasoning given by the High Court, in the decisions noted by us earlier, is in our opinion, unimpeachable. This Court had as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150, defined the word 'production' Albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in t....
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....ear on the scope of the expression 'manufacture', on the findings of fact that the various materials that had gone into making of the radio frequency identification device having thus undergone a change and that they had lost their original identity, we have no hesitation in confirming the order of the Tribunal. The Revenue has not placed any fresh material either before this Court or before the Authorities below that the manufactured item was no different from the inputs that were used in bringing out a totally different marketable product." 18. We further rely on the decision of the Hon'ble Madras High Court in the case of CIT vs. Esquire Translam Industries (344 ITR 308). In the instant case, the assessee would procure electrical steel which would be assorted and converted as per their grade, size, thickness, etc. into lamination. According to the AO, the raw material and the final product was the same and that there was no change in the product and hence cannot be regarded as manufacture. Following the ratio laid down by the Hon'ble Apex Court in the case of India Cine Agencies (supra), it was held that, what is sufficient to be seen is whether a different commodity ....
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....ld that assembling amounts to manufacture. The cases are Ashok Motors Ltd. vs. CIT (1961) 41 ITR 397 (Mad), and CIT vs. Standard Motor Products of India Ltd. (1962) 46 ITR 814 (Mad), Of course the principal question involved in those cases was whether the mere sale of surplus spare-parts was an activity which entitled the assessee to relief under s. 15C, but in both the cases it was assumed that the assembling of cars is a process of manufacture or production. We have no doubt that upon any shade of meaning of the words "manufacture" or "produce" what the company was doing in this industrial undertaking was to "manufacture" and "produce" automobiles without bodies. 20. It is also observed from the standalone accounts of the UTK Unit that the assessee utilizes plant & machinery in this production process. The Revenue has contended that the assessee was using simple tools and machinery and therefore, it was not sufficient to demonstrate that any 'manufacturing activity' was being carried out at the UTK Unit. To this, we find that similar aspect was considered by the Hon'ble Himachal Pradesh High court in the case of CIT vs. Megha Dadoo (57 taxmann.com 309) wherein it was held that....
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.... not think any substantial question of law arises for consideration in the present appeals. The appeals are thus dismissed." 21. It was also brought to our notice that, the assembling process employed by the assessee in production of the integrated engine cooling system module is considered as manufacture under the provisions of the Central Excise Act, 1944 and on production of the same, the assessee pays excise duty. If under the provisions of Central Excise Act, 1944, it is considered to be a manufacturing activity, then it does not appeal to our logic that the same activity does not amount to manufacture under the Income-tax Act, 1961. We find that this particular aspect as to whether the definition of 'manufacture' or 'production' employed for the levy of Central Excise should also be employed for this Act, was examined by the Hon'ble Supreme Court in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd (320 ITR 79) and it was answered in favour of the assessee. The relevant findings as noted by us are as under: "20. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by....
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....ing distinct end use. We thus have no hesitation in holding that the assessee was engaged in manufacture or production of an article or thing, in terms of Section 80- IC(2)(a) of the Act. 24. The next issue for our consideration is whether the UTK Unit was a consequence of reconstruction / splitting up of the existing Chennai Unit. The expression 'splitting-up of the business already in existence' indicates a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently. Splitting-up or reconstruction of business suggests that the new unit and the old unit taken together are essentially doing the same thing, what the old unit had already been doing. This particular concept was explained by the Hon'ble Delhi High Court in the case of CIT v. Hindustan General Industries Ltd (137 ITR 851). In the decided case, the assessee was manufacturing storage tanks, steel safes etc. at its Qutab Road factory. The assessee had set up a new factory at Nangoli to manufacture iron & steel equipments comprising of railway wagons, storage tanks etc. Some of the assets which were being used at Qutab....
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.... 10,532 8,979 2011-12 29,292 15,926 2012-13 28,832 19,327 2013-14 20,097 11,989 2014-15 24,496 14,885 2015-16 49,910 31,998 27. We thus note that the owned installed capacity of the Chennai Unit and the new installed capacity of the UTK Unit taken together, suggests expansion of business. On these facts therefore, the lower authorities had erred in holding that the UTK Unit had been formed by 'splitting up of business' already in existence. 28. The Ld. AR further explained to us that, the assessee is a component supplier of an automobile behemoth like Ashok Leyland. According to him, when the OEM establishes a new unit at a different location, then, as a necessary corollary, the component manufacturers like the assessee also sets up units near to their customer. The Ld. AR reasoned with us that, since the customer (Ashok Leyland) had expanded its business / capacity, the assessee being their component supplier had evidently undertaken expansion by setting up the UTK Unit, which was meant to serve the needs of the UTK factory of Ashok Leyland, over and above, the existing capacity and supply requirements of Ashok Leyland at Chen....
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....siderations, due to which, certain core components were being manufactured at one location and that the eligible unit was carrying out the other independent operations, viz. calibration, processing of locally procured components, fabrication, fitting, integration, quality testing and deliver ready products. We find that the Legislature was also aware that such arrangements may be the inter-se units of the assessee and therefore to address the same, necessary safeguards and provisions have been incorporated in Section 80-IA(8)/(10) to ensure that the transfer of such materials/components between non-eligible and eligible units are at arm's length. It is not the Revenue's case before us that the inter-unit transfers were at low prices and not at arm's length. Rather we find that, such inter-unit transactions were permissible as long as it was being undertaken at arm's length value in terms of Section 80-IA(8)/(10) of the Act. We find that, there is no material or any evidence brought on record by the AO which would show that, the radiators and inter-coolers were not being procured at arm's length price by the UTK Unit. Hence, we are unable to countenance this line of reasoning propou....