Manufacturing of new product with new technology at existing place with fresh SEZ approval does not amount to ‘splitting up or reconstruction’

Manufacturing of a new product with a new technology at the same place after taking a fresh approval from SEZ authority does not amount to ‘splitting up or reconstruction’ of an existing business for the purpose of section 10A of the Act.

Recently, the Mumbai bench of the Income Tax Appellate Tribunal (the Tribunal) in the case of Portescap India P. Limited Vs. DCIT (ITA No. 1015/Mum/2008) has held that the manufacturing of a new product with a new technology at an existing place after taking a fresh approval from SEZ authorities does not amount to ‘splitting up or reconstruction’ of an existing business for the purpose of section 10A of the Income-tax Act, 1961 (the Act). Therefore, the taxpayer was eligible to claim benefits provided under section 10A of the Act.

Facts of the case

• The taxpayer was an Indian Company engaged in the business of manufacture and sale of Brushless DC motors and stepper motors based on the technology received from its erstwhile business partner, based out of USA. The taxpayer was having its manufacturing units Nos. 2, 3 and 4 in SEZ.
• During the year under reference, the taxpayer proposed to start manufacturing a different kind of motors with a technology received from the Swiss company. For this purpose, the taxpayer surrendered the Unit No. 2 which was not fully used for producing the existing motors and made a fresh application to the SEZ authorities for starting a new undertaking (‘Portescap’) for the manufacture of new motors at the same premise i.e. Unit no. 2.
• The SEZ authorities granted permission to manufacture new motors in Unit No.2. The taxpayer imported new machinery in the 6 July 2003 and after completing necessary formalities started manufacturing new motors from 14 July 2003. The taxpayer claimed deduction under section 1 0A of the Act for the new Unit No. 2.
• The Assessing Officer (AO) disallowed the taxpayer’s claim concluding that the taxpayer started manufacturing new motors in Unit No.2 which was an existing unit and therefore, new undertaking was formed by splitting up of a business which is in existence. The Commissioner of Income-tax [CIT(A)] upheld the order of AO.

Tax department’s contention

• The tax department concluded that the taxpayer continued to manufacture the same product from the Unit No. 2 which was an existing unit and therefore the new undertaking was formed by splitting up of a business which was already in existence.
• Even if it was accepted that new machinery was imported in the first week of July, it is irrational and illogical to accept that the machinery were installed and commercial production started from 14 July 2003.

Taxpayer’s contention

• The taxpayer contended that Portescap was altogether a new undertaking in which new product was produced with different technology.
• Unit No. 2 was a physical premise which was surrendered and a fresh application was made to SEZ authorities to re-allot the same for starting the new undertaking. After receiving the permission, the taxpayer commenced manufacturing of new motors and special assemblies from 14 July 2003.
• The new machinery was imported for the new undertaking through aircraft which was boarded on 6 July 2003 which immediately carried the machinery to India. Considering that installation of machinery was not a complex task, there is nothing illogical in machinery being used for the commercial production from 14 July 2003 on wards.
• After commencement of production of new motors in Unit No.2 substantial amount of additional space and machinery were acquired which were substantially higher than those used for production of existing motors.
• The taxpayer produced the technical specifications and photographs of the existing as well as new motors to demonstrate that existing motors are different from the new motors.
• It was further contended that technology being different, market being different, even books of accounts are maintained separately and the customers also being different, there is no question of either expansion of existing business or reconstruction of the existing business.
• The new undertaking has not been formed by splitting or reconstruction of the existing business. The taxpayer submitted documents related to relevant permissions, allotment, letters, bills, invoices, details of exports and sales including photocopies of the unit being manufacture.

Tribunal’s rulings

• The Tribunal from the order of the tax authorities observed that the explanations provided by the taxpayer were overlooked by them, while denying the deduction under section 10A of the Act.
• It is unnecessary to doubt that the production in new Unit No.2 started in July 2003, since the taxpayer obtained permissions from the respective authorities and there is evidence that this unit was surrendered and re-allotted for manufacturing new motors with new technology. Even if the production was delayed by a week or so, doesn’t make material difference as the taxpayer had more than eight months for producing new motor.
• The Tribunal rejected tax department’s contention that entire production of new motors was done from the existing unit since the tax department could not explain that when the technology was totally different, how a new motor which is clearly different in its specifications can be manufactured on old technology/ old machinery.
• The Tribunal also observed that it was not a case of shifting from old technology to the new one as the production and sale of old motors were not affected in way and the users/ customers for both the type of motors were different. The tax department failed to refute or give reasons for not accepting this contention of the taxpayer.
• Accordingly, the Tribunal held that the taxpayer was eligible for claiming deduction under section 10A of the Act.

Our Comments

This is an important ruling by the Mumbai Tribunal where it has been held that the manufacturing of a new product with a new technology at an existing place after taking a fresh approval from SEZ authority does not amount to ‘splitting up or reconstruction’ of an old unit. It is pertinent to note that benefit of section 10A of the Act is available up to Assessment Year 2011- 12. Though this decision deals with the benefit available under section 10A of the Act, it may help cases with a similar set of facts to avail benefit under section 10AA of the Act (relating to tax holiday for newly established units in SEZ) where similar conditions exist. However, it is important to examine facts and circumstances of each case to decide on eligibility to claim such benefits provided under the Act.

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