Assembling Components to Form New Module Qualifies as Manufacturing Activity: ITAT

The Income Tax Appellate Tribunal (ITAT), Chennai, has ruled that assembly of parts to form a new product will be treated as manufacture when the final product is completely new and different than the input.

The assessee, Alkraft Thermotechnologies, filed an appeal before the Income Tax Appellate Tribunal (ITAT), Chennai, challenging a common disallowance claimed under section 80-IC of the Income Tax Act for AYs 2011-12 to 2013-14, 2017-18 and 2018-19.

The main issue before the high court was whether the deduction claimed by the assessee under section 80-IC of the Income Tax Act was towards the profit earned by its Uttarakhand unit.

The assessee manufactures engine cooling systems. It had established its Uttarakhand Unit to fulfil the requirements of complete cooling systems of Ashok Leyland, which had also set up a new truck manufacturing unit in Uttarakhand.

The assessing officer had disallowed the company’s deduction claimed under section 80-IC of the Act. The main reason for the disallowance as per the AO was that the assessee was not manufacturing any product in the Uttarakhand Unit, and the unit was formed by splitting up its existing business. The AO claimed that the assessee did not meet the conditions outlined in Section 80-IC.

On the other side, the assessee company argued that it had undertaken the manufacturing process at its Uttarakhand Unit. It showed the picture of the complete final product, which was different from the inputs. The assessee also argued that the Uttarakhand Unit was established as a part of business expansion, as Ashok Leyland had set up a new unit in Uttarakhand. Therefore, to avoid high transport costs and ensure real-time supply, the assessee also established its unit in Uttarakhand.

The ITAT noted that the assessee company was assembling different components into a combined engine cooling system at its Uttarakhand Unit, and without this process, the final product could not exist. Further, the final product was completely different than the inputs. As per the tribunal, this activity is treated as ‘production’ or ‘manufacture’ under Section 80-IC(2)(a) of the Income Tax Act.

Another issue was whether the Uttarakhand Unit was formed by splitting up or reconstructing an existing unit. “Splitting up” means breaking an existing business into parts so that the new and old units together do only what the old unit was already doing.

As per the tribunal, a company is said to be established by splitting up a business if the existing unit and the new unit taken together are doing the same quantum of business, which, otherwise, the existing unit was already doing. The Tribunal noted that in the present case, even after the establishment of the Uttarakhand unit, the Chennai unit’s production did not change. The Uttarakhand Unit also made substantial value additions. Further, the inter-unit transactions were at arm’s length.

Therefore, the tribunal held that this was a case of expansion of business rather than the splitting up of an existing business. The Tribunal directed the AO to allow the benefit of deduction towards the income earned from the Uttarakhand Unit under section 80IC of the Income Tax Act.