Delhi High Court: Coating of Titanium with oxides of noble metals is manufacture u/s 80-IA

M/s Titanor Components Ltd. v. CIT & Anr, on 4 February, 2011

ITA No. 24/1999

Assessment Year: 1994-95

Question/s before the Hon’ble Court:

(i). Whether coating with oxides 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(2)(v) 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 80IA(2) of the Income Tax Act, 1961, is erroneous being (a). Contrary to mandatory provision of section 80IA;

(b). Contrary to and inconsistent with the evidence on record?

Relevant facts: The assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as Alpha) alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MODVAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

The assessing officer was evidently of the view that the deduction under Section 80IA of the I.T. 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.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 12.1: “It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation.”

Para 12.2: “But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed.”

Para 13: “As in the Central Excise and Salt Act, 1944, in the I.T. 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 I.T. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.”

Para 14.1: “In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.”

The decision is available here.