Case of Authority for Advance Rulings, January 27, 2009 (case Shri Ramit Kumar Sharma Vs Director of Income Tax (International Taxation-1))

PresidentP.V. Reddi, J. (Chairman) and A. Sinha and Rao Ranvijay Singh, Members
Resolution DateJanuary 27, 2009

Judgment:

Rao Ranvijay Singh, Member, (At New Delhi)

1. The applicant is a non-resident individual as referred to in sub-clause (i) of Clause (a) of the Section 245N of the Income Tax Act, 1961 ( in short the Act) and has reportedly stayed outside India for more than 182 days in each year during the span of last 10(ten) years. In the application filed before us it has been stated that the applicant intends starting a 100% ancillary unit to one tractor manufacturing industry in the state of Himachal Pradesh during the financial year 2008-09 with initial investment of Rs. 40 lakhs in the Plant and Machinery and the said investment will gradually go up to Rs. 1 (one) crore. The applicant avers that the proposed business establishment will be covered as small-scale industrial unit in the status of a proprietary concern. The applicant's primary job, as stated, will be to provide milling, tooling and grinding of the surface of the raw castings of Rear Cover & Differential Housing which are important parts of tractors. These raw castings are to be provided by the Principal and they will be, as stated, processed by the applicant within the specified parameters given by the Principal. The processing is reportedly to be done through requisite technology such as Special Purpose Machines (SPM), special Jigs, Jags and tools. The applicant avers that pursuant to processing, a new product/article called 'Machined casting' is manufactured and these 'machined castings' fit compatibly into tractor parts.

2. Based on the above facts, the applicant sought advance ruling from this Authority on the following question:

1. Whether the applicant would be eligible for deduction under Section 80 IC(2) (similar to Section 80 IB(4) of the Income-tax Act 1961) for carrying out activities as ancillary unit as defined in Section 80 IA(12)(f).

In course of hearing of the case, we have, after notifying the applicant's and Revenue's representatives, recast the above question in the following terms:

1. Whether the applicant would be eligible for deduction under Section 80-IC(2) of the Income-tax Act, 1961 for carrying out the activities stated in the application as a small scale industrial undertaking / ancillary unit?

3. In the statement of facts the applicant has submitted that the moment the raw castings is chiselled into 'machined castings', the event of manufacturing takes place and the applicant is eligible for the requisite deduction under Section 80-IC(1)(2) of the Act. Placing reliance on the decision of Madras High Court in the case of Perfect Liners, reported in 142 ITR 654, it has been emphasized that the industrial activities proposed to be carried out by the applicant tantamounts to manufacturing or production of articles or things. Section 80-IC of the Act, inserted by the Finance Act, 2003 with effect from 1st April, 2004, is a special provision in respect of certain undertakings or enterprises in some specified states and the applicant's case, as stated, falls within the four corners of the said section. Since the applicant is a Small Scale Industry, it has further been stated that the applicant's case gets indirectly strengthened by the definition of 'Small Scale Industries' given in Section 80-IB(14)(G) of the Act which lays down that 'Small Scale Industrial Undertaking' means an industrial undertaking which is regarded as a Small Scale Industrial Undertaking under Section 11B of the Industries (Development and Regulation) Act, 1951. Section 11B of the Industrial (Development & Regulation) Act regards an industrial undertaking as a Small Scale Industry if it is engaged in a business of the manufacture of parts, components, tooling or intermediaries.

4. In the comments furnished, the Revenue has stated that the details filed by the applicant are inadequate to ascertain whether the proposed activities constitute 'manufacturing' to enable him (the applicant) to avail the deduction under Section 80-IC(2) of the Act. The Revenue submits that what constitutes a manufacturing activity has been explained by the Supreme Court in the case of Union of India v. Delhi Cloth and General Mills (1977) ELT(J) 199 wherein it has been observed that the manufacturing process necessarily postulates some change in the shape of new articles or things with a distinct name, character or use. It has been emphasized that in the instant case no new article or thing has been manufactured and it can thus be said that the applicant has not done any manufacturing to enable it to merit the requisite deduction under Section 80-IC(2) of the Act.

5. The representative for the Revenue has further argued that the applicant has received the raw castings from the Principal and has immediately sent back these raw castings to the principal after making some cosmetic changes. The process adopted by the applicant cannot be termed as manufacturing process as no new product has come into being. The decision in the case of Perfect Liners (supra), as relied upon by the applicant, is not applicable to the facts of the case. Reliance is placed on the decision of Rajasthan High Court in the case of CIT v. Lucky Minerals Pvt. Ltd.

6. In the course of hearing of the application we required the applicant's counsel to furnish details of manufacturing processes which are to be undertaken at the proposed unit by the applicant. The counsel for the applicant has accordingly furnished the details comprising of (a) Process flow chart (b) Operation Sketches (c) Check Sheets (d) Work Instruction (e)Tool Detail of Machine (f) Measuring Instruments.

7. Explaining the various manufacturing processes involved, the counsel for...

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