M/S Polyflex (india) Pvt. Ltd. v. the Commissioner of Income Tax & Another
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order dated 25.02.2014 passed by the High Court of Karnataka at
Bengaluru in Income Tax Appeal No. 623/2007, by which the High Court
has allowed the said appeal preferred by the Revenue, the assessee has
preferred the present appeal.
2. The facts leading to the present appeal in nutshell are as under:
That the appellant – assessee is having a manufacturing uni t at
Pune in which the appellant – assessee is manufacturing ‘polyurethane
foam,’ which is ultimately used as automobile seat. The assessee filed
its return of income for the assessment year 2003-04 and claimed
deduction under Section 80-IB of the Income Tax Act (for short, ‘ IT
Act’). The assessing officer disallowed the deduction under Section 80-
IB of the IT Act by observing that the nature of the busi ness of the
assessee is “manufacturer of polyurethane foam seats” which falls under
entry 25 to the Eleventh Schedule of the IT Act and therefore the assessee
shall not be entitled to deduction under Section 80-IB. However, it was
the case on behalf of the assessee that different sizes of polyurethane
foam are used as automobile seats and therefore the end product can be
said to be the automobile seat which is different than the polyurethane
foam and therefore the same does not fall under entry 25 to the Eleventh
Schedule of the IT Act. However, the assessing officer did not accept
M/S POLYFLEX (INDIA) PVT. LTD. v. THE COMMISSIONER
OF INCOME TAX & ANOTHER
the same by observing that as ‘polyurethane foam’ is made of Polyol
and Isocyanate and other components, the deduction under Section 80-
IB of the IT Act cannot be given to the assessee-company as S ection
80-IB(2)(iii) states that the benefit of deduction under the said sect ion
cannot be given if the assessee manufactures or produces any article or
thing specified in the list in the Eleventh Schedule of the IT Act.
2.1 The assessee preferred an appeal before the Commissi oner
of Income Tax (Appeals) (for short, ‘CIT(A)) against the assessment
order. The CIT(A) upheld the order of the assessing officer. The CIT(A)
observed that the two chemicals, namely, Polyol and Isocyanate used in
the manufacture of polyurethane foam seats assemblies were the basic
ingredients of polyurethane foam and therefore the case would squarely
fall in what is specified in the Eleventh Schedule.
2.2 Against the order of the CIT(A), the Assessee filed an appeal
before the Income Tax Appellate Tribunal (for short, ‘ITAT’). The ITAT
set aside the assessment order as well as the order passed by the CIT(A)
and allowed the appeal filed by the assessee by obs erving that
polyurethane foam was neither produced as a final product nor is an
intermediate product nor is a by-product by the assessee and th e same
was used as automobile seat and therefore does not fall within entry 25
to Eleventh Schedule of the IT Act and therefore the assesse e shall be
entitled to claim deduction under Section 80-IB of the IT Act. The order
passed by the ITAT has been set aside by the High Court, by the impugned
judgment and order specifically observing that what is manufactured by
the assessee is polyurethane foam in different sizes/designs and there is
no further process undertaken by the assessee to convert it into automobile
seats and therefore what is manufactured by the assessee is polyurethane
foam falling in entry 25 to Eleventh Schedule and therefore the assessee
shall not be entitled to deduction claimed under Section 80-IB of the IT
Act. Consequently, the High Court has allowed the appeal preferred by
the revenue and has quashed and set aside the order passe d by the
ITAT and has restored the assessment order denying the d eduction
claimed under Section 80-IB of the IT Act. The impugned judgment and
order passed by the High Court is the subject matter of present appeal.
3. Shri Preetesh Kapur, learned Senior Advocate has appea red
on behalf of the assessee and Shri Balbir Singh, learned A dditional
Solicitor General of India has appeared on behalf of the revenue.
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3.1 Shri Preetesh Kapur, learned counsel appearing on behalf of
the assessee has vehemently submitted that when on appreciation of the
entire evidence on record and after considering the process undertaken
by the assessee and after considering the fact that the end product was
automobile seat, the ITAT allowed the appeal and held that the assessee
is entitled to claim deduction under Section 80-IB of the IT Ac t, the
same was not required to be interfered with by the High Court.
3.2 It is submitted that the relevant pre-condition for the assessee
to be eligible for the benefit under Section 80-IB of the IT A ct in the
present case is that the final product manufactured and s old by the
assessee ought not to have an article classifiable in the Eleventh Schedule.
It is submitted that the final product manufactured by the assessee is not
polyurethane foam, but automobile seat in which polyurethane foam is
used. It is submitted that the learned ITAT returned a categorical finding
of fact that the final product manufactured by the assessee is automobile
seat in which polyurethane foam is used. It is submitted that if that be so,
the manufactured item shall not come within any of the entry of Eleventh
Schedule and therefore the assessee shall be entitled to deduction under
Section 80-IB of the IT Act.
3.3 It is submitted that in fact the assessee received orde rs for
supply of automobile seats and even paid the sales tax a s automobile
seats. It is submitted that the final product is commercially distinct from
polyurethane foam.
3.4 It is submitted that the High Court ought to have appreciated
that in fact in assessee’s own case in respect of the very same product,
in relation to classification for the purposes of payment of excise duty,
the CEGAT has observed that the product manufactured by the assessee
can never be said to be known in trade parlance as articles of
polyurethane foam and hence cannot be classified as polyurethane foam.
It is submitted that the order passed by the CEGAT had attained finality.
It is submitted that therefore once the articles/goods manufactured cannot
be classified as polyurethane foam under the Excise Act, the same cannot
be treated and/or considered as polyurethane foam under the IT Act.
3.5 It is submitted that in the present case the Tribunal n oted in
detail the elaborate manufacturing process undertaken by the a ssessee
whereby the final product, namely, car seats are manufactu red. It is
submitted that after elaborating the process, the Tribunal has returned a
M/S POLYFLEX (INDIA) PVT. LTD. v. THE COMMISSIONER
OF INCOME TAX & ANOTHER [M. R. SHAH, J.]
finding of fact that the said process clearly results in the emergence of a
final product which is commercially distinct and di fferent from
polyurethane foam and is known in the market as car seats and not as
polyurethane foam.
3.6 It is submitted that the High Court has reversed the decision
of the ITAT without even noticing the above process or the CE GAT’s
order and also without giving any reason as to how the above finding of
fact was perverse. It is submitted that at no stage the d epartment has
denied that the final product sold by the assessee is the car sea t.
It is further submitted that it is a settled position of law that the
moment a commercially distinct commodity, known in trade parlance by
a different name and having a different use, comes into being, it ceases
to be classifiable as the raw material/ingredient from which it is made.
3.7 It is further submitted by Shri Preetesh Kapur, learned counsel
appearing on behalf of the assessee that entry 25 of Eleventh Schedule
specifically talks about “latex foam sponge and polyurethane foam” and
it does not talk about the “latex foam sponge and polyurethane foam
preparations” and/or items and/or articles made from the aforesaid foam.
It is submitted that whenever the legislature wanted, there is a specific
entry like entry 2 and 3 in which it is specifically mentioned “tobacco
and tobacco preparations and cosmetics and toilet prepara tions”. It is
submitted therefore that when the final product is automobile seat and
the polyurethane foam loses its characteristics which is used as ingredient,
the assessee shall be entitled to deduction under Section 80-IB of the IT
Act.
3.8 Making the above submissions and relying upon the decisions
of this Court in the cases of Commissioner of Income Tax, Madras v.
Vinbros and Company, (2015) 14 SCC 483 and Commissioner of
Income Tax-I, Mumbai v. Hindustan Petroleum Corporation Limited,
(2017) 15 SCC 254, it is prayed to allow the present appeal.
4. Shri Balbir Singh, learned ASG appearing on behalf of the
revenue has vehemently submitted that what is manufactured by t he
assessee is polyurethane foam in different shapes/designs an d what is
sold is different sizes/designs of polyurethane foam which ultimately is
being used by the assembly operator for manufacturing of car seats/
automobile seats and the same is used as ingredient and after the process
of moulding etc., the seats are manufactured. It is submitted that
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therefore, by no stretch of imagination, it can be said that the assessee is
manufacturing and selling automobile seats. It is submitted that what is
manufactured and sold is the polyurethane foam which is manufactured
by using two chemicals Polyol and Isocyanate.
4.1 It is submitted that the High Court has specifically observed
and held that except manufacture of polyurethane fo am which is
manufactured by injecting two chemicals, there is no furth er process
undertaken by the assessee. It is submitted that as right ly observed by
the High Court the assessee produces the polyurethane foam seats which
are used for making end product to be fixed in different vehicle s. It is
submitted that the assessee as such is not manufacturing the end product,
namely, automobile seats to be fixed in the vehicles. For the aforesaid,
Shri Balbir Singh, learned ASG has taken us to the findings recorded by
the CIT(A) and has submitted that after considering the detailed process
undertaken by the assessee, the CIT(A) opined that the assessee is not
the manufacturer of the car seats and what is manufact ured is the
polyurethane foam which is being sold in different designs/shapes/sizes.
4.2 It is submitted that therefore as the assessee is manufacturing
polyurethane foam which falls under entry 25 of the Eleventh Schedule
and therefore considering Section 80-IB(2)(iii), the assessee shall not be
entitled to deduction under Section 80-IB of the IT Act. It is submitted
that therefore the impugned judgment and order passed by the H igh
Court is not required to be interfered with.
5. We have heard learned counsel for the respective partie s at
length.
6. The short question which is posed for the consideration of this
Court is, “whether the assessee is eligible for the benefit under Section
80-IB of the IT Act?”
7. The assessee shall not be eligible for the benefit under Section
80-IB of the IT Act if it is found that the article s and/or goods
manufactured by the assessee do not fall and/or classi fiable under
Eleventh Schedule. According to the revenue, the as sessee is
manufacturing polyurethane foam which falls under the Eleventh
Schedule. However, it is the case on behalf of the assessee that the final
product manufactured and sold by the assessee is automobile seats/car
seats which is other than the manufacture of polyurethane foam.
M/S POLYFLEX (INDIA) PVT. LTD. v. THE COMMISSIONER
OF INCOME TAX & ANOTHER [M. R. SHAH, J.]
8. By the impugned judgment and order, the High Court has
specifically observed and held that what is manufactured a nd sold by
the assessee is polyurethane foam which is manufactured by injecting
two chemicals, namely, Polyol and Isocyanate and the polyurethane foam
which is manufactured by the assessee is used as in gredient for
manufacture of automobile seats. The assessee is ma nufacturing
polyurethane foam and supplying the same in different sizes/designs to
the assembly operator, which ultimately is being used for car seats. The
assessee is not undertaking any further process for end product, namely,
car seats. The polyurethane foam which is supplied in different designs/
sizes is being used as ingredient by others, namely, assembly operators
for the car seats. Merely because the assessee is using the chemicals
and ultimately what is manufactured is polyurethane foam and the same
is used by assembly operators after the process of moulding as car seats,
it cannot be said that the end product manufactured by the a ssessee is
car seats/automobile seats. There must be a further process to be
undertaken by the very assessee in manufacturing of the car seats. No
further process seems to have been undertaken by the assesse e except
supplying/selling the polyurethane foam in different sizes/designs/shapes
which may be ultimately used for end product by others as car seats/
automobile seats.
9. So far as the reliance placed upon the decisions of this Court in
the cases of Vinbros and Company (supra) and Hindustan Petroleum
Corporation Limited (supra) , relied upon by the learned counsel
appearing on behalf of the assessee is concerned, the same shall not be
applicable to the facts of the case on hand and/or the same shall not be
of any assistance to the assessee in view of the findi ngs recorded
hereinabove.
10. In view of the above when the articles/goods which ar e
manufactured by the assessee, namely, polyurethane foam is an article
classifiable in the Eleventh Schedule (entry 25), considering Section 80-
IB(2)(iii), the assessee shall not be entitled to the benefit under Section
80-IB of the IT Act. The High Court has rightly held so and has rightly
set aside the order passed by the ITAT and has rightly restored the order
passed by the assessing officer denying the deduction/benefi t claimed
under Section 80-IB of the IT Act. We are in complete agreement with
the view taken by the High Court and that of the assessi ng officer,
confirmed by the CIT(Appeals).
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11. In view of the above and for the reasons stated above, t he
present appeal fails and the same deserves to be dism issed and is
accordingly dismissed. However, there shall be no order as to costs.
Ankit Gyan Appeal dismissed.
(Assisted by : Rahul Rathi, LCRA)
M/S POLYFLEX (INDIA) PVT. LTD. v. THE COMMISSIONER
OF INCOME TAX & ANOTHER [M. R. SHAH, J.]