Issue 1: Whether assembling of mobile accessories & parts in India is manufacturing for claiming lower rate of Corporate Tax (15%) under newly inserted Section 115BAB of the Income Tax Act, 1961?
Income Tax Act, 1961 read with relevant rules made thereunder.
Section 115BAB has been inserted to the Income Tax Act, 1961 by the Income Tax (Amendment) Ordinance, 2019 that prescribes for 15% tax rate for domestic company that is incorporated after 1st Oct, 2019 & is solely engaged in the manufacturing or production of any article or thing.
The Ordinance to the Income Tax Act, 1961 does not define the term ‘manufacturing’ however, as per Section 2(29BA) ‘manufacture’ means a change in a non-living physical object/article resulting in transformation into new & distinct object having a different name, character and use.
Recently, ITAT Mumbai in the case of ITO vs. Sudarshan R. Kharbanda dated 21.09.2018 held that assembling of watches even without use of any sophisticated machinery is ‘manufacturing’ for purpose of claiming deduction under Income Tax Act as the resultant end product is commercially different in the trading world. Relevant Extract is as follows:
“………..If the aforementioned judicial pronouncements and the facts available on record are kept in juxtaposition and analyzed with the assembling of parts done by the assessee, we find that the resultant end product is commercially known differently in the trading world, therefore, certainly it can be said that the activity of the assessee amounts to manufacture, consequently, entitled to deduction u/s 80IC of the Act, because, assembling of various parts in a specified manner and the net results into watches which are used by the public at large for different purposes and is commercially known differently, therefore, it amounts to manufacturing. The resultant end product is outcome of combination of efforts with the help of men and machine……Thus, the stand of the Ld. Commissioner of Income Tax (Appeal) is affirmed. Finally, the appeal of the Revenue is dismissed.”
Also, Supreme Court in the Case of CIT Mumbai vs. M/s. Poly Yarn Private Limited dated 20.01.2010 has asked the revenue department to take into account the process applicable to the product and not dictionary meaning of ‘manufacture’ to decide the issue of benefits under the provisions of Income Tax Act, Excise Act and Customs Act. Relevant Extract is as follows:
“The short question which arises for determination in this batch of Civil Appeals is: Whether twisting and texturizing of partially oriented yarn (‘POY’ for short) amounts to ‘manufacture’ in terms of Section 80IA of the Income Tax Act, 1961? ……..Repeatedly this Court has recommended to the Department, be it under Excise Act, Customs Act or the Income Tax Act, to examine the process applicable to the product in question and not to go only by dictionary meanings……”
Further, under various judgments of tax authorities & courts including Supreme Court it has been held that manufacturing not necessarily results into a completely new product but means a change of material into product that is new & distinct & has a different commercial identity in the market. Thus meaning of term manufacture is to determined according to the process involved & the differentially of resultant product either tangible or commercial.
The materials used in the assembling process should not individually serve the same purpose as resultant product assembled should serve. In the case of Acqua Minerals (P) Ltd. vs Deputy Commissioner Of Income Tax it was held that production of packaged drinking mineral water is not manufacturing for claiming deduction under income tax act, as it serves the same purpose as normal water would serve.
Taking the above provisions & discussions into consideration, it is clear that the essential element/condition to get in the ambit of manufacturing is that the resultant product should be commercially different and should serve the different purpose. We thus conclude that assembling of mobile parts & accessories using imported material shall be treated as manufacturing for purpose of Section 115BAB to claim concessional tax rate of 15%.