It is said that a person feels joyous and happy when something unexpected positively happened in one’s life but on other hand unexpected kindness showered on them by almighty God also frightened one’s inner soul simultaneously from an unexpected fear that what will happen if this happiness is taken away back. The same situation is happening with Indian tax payer corporates or would be corporate assesse. May be first time in the history of India, The Government had given tax bonanza without any demand from the taxpayers in the form of lower tax rate for new manufacturing companies. May be Indian tax rate for corporates are best comparable with rate of another country in this universe. May be such rates were mainly designed to attract global investors but Indian investors can also reap benefit out of it. Now tax payers are joyous on tax rate cut that their tax outgo will reduce substantially but also a fear is creeping in their mind whether they will fulfil all the conditions to get it qualify. What would be incidence if they cannot qualify in tax assessment.
Such a low tax rate coupled with huge gap with normal tax rate are tempting businessmen to arrange their affairs in such a way that it will be very difficult task for taxman to disqualify them for reap benefit of new tax rate in future. Though setting up new business with large capex and complex structure is not everybody’s cup of tea but there is various business whereas present structure is very simple and creation of a new undertaking have low cost compared to estimated tax benefit.
Main thrust of section 115BAB is on MANUFACTRING or PRODUCTION. Here the moot question is what is the meaning of manufacturing? Whether tax benefit is available only for self-manufacturing or merchant manufacturer is also eligible to claim benefit? Whether units which are only assembling various parts will also get eligible? These type of question may arise not only to businessman but to professional also.
For ease of understanding of the dilemma, now take a hypothetical situation wherein a person is running a private limited company. It purchases raw fabrics from the market and get it processed from outside manufacturing units on JOB WORK BASIS. Sometimes various value addition work like Embroidery, fixing of lace, Stones etc is also done on JOB WORK BASIS from outside manufacturing works. It has stitching machines, cutting machines, rolling machines and other small machineries in its premises which is rented. Finish fabrics is converted in to small pieces of various length and size in a shape like Shirts, Lehnga etc but unstitched and sold to buyers as such. Sometime stitching machines is also used wherein pieces are stitched which is generally known as Lehnga, T shirts, Shirts etc and sold to buyers. Now management wants to form a new company and to fulfil all the condition narrated in section 115BAB, they are planning to purchases all new machineries which are presently used by them like stitching machines, Cutting, rolling machines etc because they considered themselves as manufacturer albeit most of work is done through job work.
Apart from textile, such type of job work is also undertaken in other various type of industries like Steel, Rolling, Food based Industries, FMCG products, Tobacco products etc.
Eligibility Conditions and connected matters for low tax rate: Now let us take a look of conditions narrated in section 115BAB and look upon whether all these conditions are fulfilled or not to take benefit of section 115BAB in above example. These conditions are as under:
1. The assessee should be a domestic company. This section is not applicable to other person like Individual, firm, LLP etc. and FOREIGN COMPANIES.
2. The company has commenced the manufacture or production of an article or thing on or before 31st March, 2023.
3. The business of such company is not formed by splitting up or re-construction of a business already in existence.
4. Such company is incorporated on or after 1st October, 2019.
5. Such company does not use second-hand machinery (except imported second-hand machinery) whose value is more than 20% of the value of the total Plant & Machinery used by the company. It is also worthwhile to mention here that second hand plant & machinery shall be eligible only when such plant & machinery is never used in India and no depreciation has been used by any person in India on such plant & machineries. Looking to the language it is advisable that purchaser shall purchase machineries directly from manufacturer and a certificate be obtained from seller that plant & machineries are new one and never used in India.
6. The company does not use any building previously used as a Hotel or Convention Centre and for which a deduction under Section 80ID has been allowed.
7. The company is not engaged in any other business other than:
> Manufacture of an article or thing.
> Research in relation to such manufacture or production
> Distribution of such article or thing manufactured or produced by it.
8. The company is not engaged in the following businesses: –
> Software Development
> Conversion of marble blocks or similar materials into slabs
> Bottling of gas into cylinders
> Printing of books
> Production of cinematograph films
> Any other notified business
9. The company does not claim any of the deductions/exemptions/benefits mentioned below in computing the total income for the purpose of income tax viz: –
> Tax Holiday for Units in Special Economic Zones (Section 10AA)
> Additional Depreciation u/s 32((iia)
> Investment Linked deduction u/s 32AD
> Benefits u/s 33AB or 33ABA
> Accelerated R&D allowance (Clause (ii), (iia), (iii) of Sub Section (1), Sub Section (2AA) or Sub Section (2AB) of Section 35)
> Allowances u/s 35AD, 35CCC or 35CCD
> Deductions under Chapter VIA under the heading C: Deductions in respect of certain Exp, excluding deduction for additional employment u/s 80JJAA
10. The company informs the Income Tax Department of exercising such option to claim lower tax rate in the prescribe form on or before the due date of filing income tax return for the company for the first AY. Option once exercised can-not be withdrawn.
Recently CBDT has prescribed Form no 10ID for this purpose. If any company want to pay tax under this section than it has to file electronically under DSC form no 10ID on or before due date of filing of return of Income.
11. Deductions under Chapter VIA under the heading C: Deductions in respect of certain Exp, excluding deduction for additional employment u/s 80JJAA is not claimed.
12. No benefit of set off of loss or unabsorbed depreciation shall be available to the assesse company. Looking to the language of section normal loss and depreciation can be set off but only loss or depreciation generated through section enumerated in point no 7 are not available means unabsorbed depreciation allowance due to claim of additional depreciation shall not be set off but available under normal depreciation shall be available for set off.
13. Profit should be not be unreasonable if there are close relation between the transacting parties otherwise reasonable profit shall be determined by AO which seems to be reasonable looking to the facts of the case.
If we compare all these conditions and connected matters with our hypothetical example, then one can find that company can fulfil all the conditions without much difficulty EXCEPT A FEW CONDITION specially to prove the fact it is manufacturing company producing or manufacturing any article or thing.
Meaning of Manufacture or production: In all these conditions, the most important word is manufacture or production of an article or thing. Earlier there was lot of chaos on the meaning of manufacturer but definition of the word was inserted into Income Tax Act vide Finance Act, 2009. Section 2(29BA) of the Income Tax act defines the word Manufacture, which is as under:
“Manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing-
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;
Interestingly, though the word manufacture has been defined in the Act but the word production is nowhere defined in the Income Tax Act yet but the Apex court of the land in a series of judgements has held that the word ‘production’ has a wider connotation in comparison to ‘manufacture’ and held that any activity which brings a commercially new product into existence constitute production.
Reliance can be placed on CIT v/s HPCL (Civil Appeal no 9295 of 2017) and Arihant Tiles and Marbles P Ltd (2010)320 ITR 79 delivered by Supreme Court of India on this point.
From the above, One can say that any product which is commercially new product and marketable as such is production though it might not qualify for manufacture. For example, mixing of pan masala with tobacco is not qualified as manufacture but certainly it is commercially new product hence can be classified as production.
Self-manufacturing or job work: Now the next question arise is whether manufacture or production should be on account of self or it can be outsourced i.e. job work.
Answer of this question is very difficult and whole of the issue revolved around this question only. No clear wording is given in the Act which is diffusing doubts among the stakeholders. But if we analyse the language of the section, It is almost on the same line as given in earlier section like 80IA, 80IB, 10AA etc hence we can resort the help from judicial pronouncements of various courts made in the past on the same question.
Judicial Pronouncements for manufacture or production:
The Hon’ble Allahabad High Court in the case of Talwar Khuller (P.) Ltd.  235 ITR 70 (All) has held that the assessee company was manufacturing various articles of brassware from artisans under its supervision and control. It was also noted that the assessee gave the pattern and design of the articles to be manufactured by the artisans and advanced money to them for purchasing the raw material. It was also noted that the artisans made articles in different models. It further noted that the articles in raw form were examined by the assessee and then directions were given to the artisans to modify and polish the same. Under these facts, it was held by Hon’ble Allahabad High Court that the assessee company was a new company manufacturing company engaged in manufacturing and processing of article.
Likewise, The Hon’ble Bombay High Court in the case of Penwalt India Ltd. 196 CTR 813 has held that the assessee is getting machinery manufactured by somebody else under its direct supervision and control and all other activities are undertaken by the assessee, the assessee is said to be engaged in manufacture of sugar and tea machinery and therefore, entitled to special deduction u/s 80I of the Act.
In “CIT, Bombay City-II v Neo Pharma Private Limited”, 137 ITR 879(Bom), the assessee company, which was incorporated mainly with the object of engaging itself in the business of manufacturing and processing pharmaceuticals, entered into an agreement with another company, “Pharmed”, to make available to the assessee their premises, plant, machinery and the services of the staff such as chemists and labourers to carry on the manufacturing activities for and on behalf of the assessee. Exercising the powers u/s 263 of the Act, the Commissioner held that an assessee could be said to be the manufacturer of goods or engaged in the manufacture or processing of goods only when it carried out all the operations involved in converting the raw-material into finished goods with the aid of machinery owned by itself and with labour in its direct supervision; and that since the machinery and services rendered for the conversion of raw-materials into finished goods in that case were provided by Pharmed, the assessee could not be said to be a manufacturer. The assessee’ s appeal was allowed by the Tribunal. The Hon’ble High Court affirmed the decision of the Tribunal, holding, inter alia, that although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees of Pharmed was also utilized in that process, the manufacturing activity was really that of the assessee and that therefore, it could not be said that it was not the assessee but Pharmed which manufactured the drugs and pharmaceuticals.
In “CIT v. Acrow India Ltd.”, 188 ITR 485(Bom), it was held that where the assessee had engaged the services of V. Company for fabrication of goods and things mentioned in the Agreement under its supervision and control with the help of technical know-how supplied by it and the assessee had also supplied all the raw-materials to V.Company, which acted only as labour contractors with the assessee, the assessee was engaged in the business of manufacturing and processing of goods.
In the case of Bidi manufacturing industry, The Hon’ble Gujarat High Court in the case of CIT v. Prabhudas Kishordas Tobacco Products P. Ltd. (2006) 282 ITR 568 (Guj), has held that the tendu leaves and tobacco, which are used as inputs, do no retain their independent identity after the bidis are rolled after undergoing several process. Commercially, the final product is known in the trade as a distinct commodity and has a separate market. Furthermore, merely because an assessee gets the work done through contract workers, in other words, enters into a contract with the workers and pays them per piece the relief could not be denied. The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee. The Tribunal was justified in treating the activities carried on by the assessee as amounting to manufacturer of bidies, entitling the assessee to relief under sections 80HH and 80-I.
Importance of intention of the Law for interpretation of status: It is a settled law that in case of vague and misleading language of Law, Statue should be interpreted with the intention of the legislature while inserting the particular amendment in the statue. The taxation law amendment bill 2019 was introduced all of a sudden vide press release on 20/09/2019. Relevant portion of said press release with respect to section 115BAB was as under: “ In order to attract fresh investment in manufacturing and thereby provide boost to ‘Make-in-India’ initiative of the Government, another new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March, 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
Conclusion: From the above discussion, we can say that new company which has been registered after 01/10/2019 can claim benefit of low tax rate if it is engaged in either manufacturing or production of an article or thing. As we discussed in earlier Para, Production is having wider meaning than manufacturing. Mainly this manufacturing or production activity should be carried out in its own manufacturing unit which has been set up with new plant & machinery. But in a situation where a part of process is outsourced than also it is fair to claim the benefit of this section. If an assesse company outsourced whole process of manufacturing than in that situation manufacturing unit which is doing job work should be in direct control and supervision of the assesse company but this manufacturing unit should have new plant & machinery because intention of the government was to promote manufacturing and investment to boost, make in India movement but certainly assembling unit having least capex should avail the benefit of this section.
In our hypothetical example cited above, it will be very tough task to claim benefit of section 115BAB though the company is said to engaged in production of article of fabrics having distinct commercial market but absence of manufacturing unit of main ingredient work i.e. processing of fabrics will make it little bit difficult. IF in the said example, weaving had been undertaken by the assesse company on its manufacturing unit and part of process have been outsourced than the answer would have been different.