Commissioner of Income Tax vs Titan Time Products Ltd.

R.M. Borde, J.—The substantial question of law that arises for consideration in all these appeals is as to whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the assessee company is a semi-conductor industry and allowing depreciation at a higher rate of 40 per cent. The assessee company is a company engaged in business of manufacturing of Electronic Circuit Boards (ECBs). On presentation of the return of income, the assessee was permitted to avail depreciation @ 25 per cent and the claim for allowing depreciation at higher rate i.e., 40 per cent was rejected by the AO. An appeal was carried by the assessee company to CIT(A) and on consideration of the contentions raised by the assessee the appeal came to be allowed. The appellate authority held that the product manufactured by the assessee i.e., Electronic Circuit Board (ECB) is a semi-conductor device and as such, the assessee is entitled to depreciation @ 40 per cent. An appeal preferred by the Revenue to the Tribunal came to be dismissed confirming the order passed by the CIT(A).

It is the contention of the Revenue that the assessee in fact purchases by way of import semi-conductor devices such as "Integrated Circuits (IC) and Mounted Piezo-Electronic Crystals, which amount to 90 per cent of the total value of the final product i.e., Electronic Circuit Board (ECB), which are fixed on the board and they are interconnected to produce the end products i.e. Electronic Circuit Board (ECB), which are used in watches. It is contended that even as per the assessee''s version the semiconductor devices used by them are not manufactured in India, which constitute 90 per cent of the total value of the final product. Thus what the assessee is doing is merely to assemble all the devices on ECBs. It is the contention of the Revenue that the assessee company is not a semiconductor industry as it does not manufacture any semi-conductor devices and thus the higher rate of depreciation claimed by the assessee has been rightly rejected by the AO restricting the claim to normal depreciation at 25 per cent only.

The respondent/assessee has controverted the contentions raised by the appellant and submitted that CIT(A) as well as the Tribunal have correctly appreciated the issue involved in the matter and held the assessee entitle to claim higher rate of depreciation at 40 per cent.

The CIT(A) in his judgment has referred to the letter dt. 3rd Feb., 2004 written by Senior Director, Department of Information Technology, Ministry of Communications and Information Technology, Government of India addressed to the assessee wherein it has been clarified that the activity undertaken by the assessee of mounting silicon chips on printed IC, ECB circuit boards is similar to manufacturing of IC i.e. ECB which are undoubtedly the semi-conductor device. It is also observed by the CIT(A) that special equipment is required in mounting of silicon chips on PCB which are the same as required in any IC manufacturing industry and as such, the chip bonding operation in ECB assembly is 1st part of the manufacturing process.

The question as to whether the activity amounts to manufacture is primarily a question of fact. It is also worth noting that during the previous 7 assessment years including those completed under s. 143(3) of the Act, the assessee has been allowed higher rate of depreciation and there was no reason quoted as to why the AO was persuaded to take a different view. The findings recorded by the CIT of Appeals on the question of facts have been confirmed by the Tribunal while turning down the appeal presented by the Revenue.

Learned counsel appearing for the Revenue has placed reliance on the judgment in the matter of Commissioner of Income Tax Vs. Fashion Prints Limited,

In the reported matter the assessee carried out the process of dyeing and printing and processing of grey cloth manufactured by a different industry. The assessee claimed depreciation under s. 32(1)(vi) of the Act contending that the processing of textiles is covered under the said item No. 21 of the list mentioned in Ninth Schedule to the Act. The learned Single Judge of this Court while dealing with the matter has held that the process of dying and printing on grey cloth admittedly manufactured by others cannot be held to be business eligible for claiming benefits under s. 32(1)(vi) of the Act. An identical view is taken in the matter of Commissioner of Income Tax Vs. Jaypee Dyeing House, .

In order to substantiate the contentions and lend support to the view taken by the CIT(A) and the Tribunal, the respondent/assessee has placed reliance on the judgment in the matter of Commissioner of Income Tax-V, New Delhi Vs. Oracle Software India Ltd., . The assessee Oracle Corporation imports master media software from Oracle Corporation USA, which is duplicated on blank discs, packed and sold in market with relevant brochures. According to assessee, it uses machinery to convert blank CDs into recorded CDs, which along with other processes become a software kit. The making of a copy which constitutes manufacture or processing goods in terms of s. 80-IAand consequentially the assessee is entitled to deduction under that section. The Department, however contended that there is no element of manufacture or processing of goods in the process of copyright. The Hon''ble Supreme Court while considering the issue has recorded a finding that the marketed copies are goods and if they are goods then the process by which they become goods would certainly fall within the ambit of s. 80A(12)(b) r/w s. 33B because an industrial undertaking has been defined in s. 33B to cover manufacture or processing of goods. A reference is made to the decision in the matter of Tata Consultancy Services Vs. State of Andhra Pradesh, . The issue was as to whether the software programme put in media for transferring or marketing is "goods" under s. 2(h) of the Andhra Pradesh General Sales-tax Act, 1957. It was held that a software programme may consist of commands which enable the computer to perform a designated task. The copyright in the programme may remain with the originator of the programme. But, the moment copies are made and marketed, they become goods. It was held that even an intellectual property, once put on to a media, whether it will be in the form of computer discs or cassettes and marketed, it becomes goods.

In the matter of Commissioner of Income Tax, Mumbai Vs. Emptee Poly-Yarn Pvt. Ltd., , the issue raised was as to whether twisting and texturizing of partially oriented yarn (POY) amounts to manufacture in terms of s. 80-IA of the IT 1961. The Supreme Court referring to the earlier judgment in the matter of Oracle Software (supra) held in the affirmative. It was observed in the aforesaid judgment that POY is a semi-finished product. It is a raw material/input. The raw material or input gets converted into a texturized yarn by reason of the thermo mechanical process. POY is unfit for the manufacture of fabric. POY, as stated above, means partially-oriented yarn whereas a cellulosic filament yarn is a final product in the sense after processing can be used directly for the manufacture of fabric. Thus, considering the ratio of the judgment cited above in the matter of Oracle Software India Ltd. (supra), we are of the considered view that the reasons recorded by the CIT(A) as well as by the Tribunal are reasonable and proper and do not call for any interference. It is also worth noting that the technical expert from the Ministry of Communications and Information Technology has opined that for the purpose of mounting of silicon chips on PCB special equipments like chip bonding/wire bonding, etc. are required which are the same required in any IC manufacturing industry and chip bonding operation in ECB assembly is first part of the manufacturing process. There is nothing contrary placed on record to controvert the expert opinion given by the technical person from the Department of Information Technology. Even otherwise, it would be quite reasonable to assume that since the assessee is applying the use of machinery and plant used in the semi-conductor industry (the opinion of the expert lends support to this conclusion), the assessee company is entitled to claim depreciation at 40 per cent in accordance with Entry No. XI, Part "A" (ii) of Old Appendix I under r. 5. For the reasons recorded above, the appeals presented by the Revenue do not deserve favourable consideration and as such, the appeals stand dismissed. In the facts and circumstances of the case there shall be no order as to costs.