Collection and transmission of data converted into paper logs/magnetic tapes amounted to manufacturing and producing of an article or thing: Delhi HC

Commissioner Of Income Tax vs M/S. Hls India Ltd. on 11 May, 2011

ITA No.627/2005

Assessment Year: 1989-90 – 2003-04

Relevant Facts:

1. The Assessee is an oilfield services company which provides services for exploration and production of hydrocarbons

2. Agreement dated 04/05/1988 was entered with Oil India Ltd. for providing information/analysis for the exploration of certain areas.

3. The assessee sought investment allowance u/s 32A of the Income Tax Act, 1961 (“Act”). The assessee also sought relief u/s 80IA / 80IB of the Act. Further, depreciation on the machinery used was claimed as 100% under Rule 5, Appendix I, Part I, III (ix) of the Income Tax Rules, 1961 (“Rules”)

4. The AO disallowed the claim u/s 32A(2) of the Act. The same was allowed by the CIT (A) and the ITAT as well for the AY 1989-90.

5. A claim u/s 80IA was raised by the assessee in AY 199192. This claim was denied by the AO but allowed by the CIT (A). On appeal, the ITAT remanded the matter back to the AO for fresh consideration.

6. On the claim under Rule 5, Appendix I, Part I, III (ix) of the Rules, the AO disallowed the same claiming that this was only available to mineral oil concerns.

Questions of law:

1. Whether the assessee is an industrial undertaking engaged in the business of manufacture or production of an article or a thing u/s 32A and u/s 80IA/80IB?

2. Whether the assessee is entitled to claim the depreciation allowance @ 100% under Rule 5, Appendix I, Part I, III (ix) of the Rules?

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

(i) Technical information may be collected below the ground, but it is processed, analyzed and technical analysis of the same is done by experts. This information is then converted into understandable format and printed into logs and recorded on magnetic tapes. This would amount to manufacture.

(ii) Drawing an analogy, an X-ray machine converts an X-ray film into an article on which the impression of the bone is carried, it is a manufacture.

(iii) Machinery used for wirelogging and other data assessment for finding oil are machinery used in mineral oil concerns and thus eligible for 100% tax deduction under Rule 5, Appendix I, Part I, III (ix) of the Rules.

The decision is available here.