) * THE HIGH COURT OF DELHI AT NEW DELHI + ITA Nos.627/2005,194/2005, 515/2006, 501/2006 208/2002, 504/2006, 683/2005, 716/2005,1081/2005 899/2007 r 668/2008, 296/2010 & 433/2009 Reserved on : 07 .04.2011 Date of Decision : 11.05.2011 Commissioner of Income Tax Delhi-IV, New Delhi ••••.• Appellant Through: Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand, Advocate. M/s. HLS India Ltd. (Now HLS Asia Ltd.} Versus ...... Respondent Through: Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. CORAM: HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE M.L. MEHTA 1. 2. 3. Whether Reporters of local papers may be allowed to see the judgment ? To be referred to the Reporter or not ? Whether the judgment should be reported in the Digest ? .-. M.L. MEHTA, J. For orders, see ITA No.194/2005. Yes Yes Yes ~~r May 11, 2011 'Ashish' ITA Nos. 194/2005, 208/2002 & 01·s. Connected Matters: M.L.MEHTA (JUDGE} tP.;14. A.K. SIKRI (JUDGE) Page 1of1 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified _) * THE HIGH COURT OF DELHI AT NEW DELHI + ITA Nos.627/2005,194/2005, 515/2006, 501/2006 208/2002, 504/2006, 683/2005, 716/2005,1081/2005 899/2007 r 668/2008, 296/2010 & 433/2009 Reserved on : 07 .04.2011 Date of Decision : Jl_.05. 2011 Commissioner of Income Tax Delhi-IV, New Delhi ...... Appellant M/s. HLS India Ltd. (Now HLS Asia Ltd.) Through: Versus Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand, Advocate. . ..... Respondent Through: Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. j) CORAM: HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE M.L. MEHTA 1. 2. 3. Whether Reporters of local papers may be allowed to see the judgment? To be referred to the Reporter or not ? Whether the judgment should be reported in the Digest? M.L. MEHTA, J. 1. By way of this judgment, we are disposing off 13 different Income Tax Appeals, ranging from assessment year 1989-90 to assessment year 2003-2004, pertaining to the same assessee ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 1of52 J d' M/S HLS India Ltd. These appeals, all filed under section 260 A of l the Income Tax Act, 1962(hereinafter referred to as the Act), have been clubbed together on the ground that the legal issues involved in these matters are similar, though the financial figures have been kept varying with the assessment years. 2. Before coming to these legal issues it would be pertinent, in the light of facts and circumstances of these cases, first of all to succinctly narrate the genesis of instant prolonged tax dispute between the Revenue and the assessee. 3. The Assessee, HLS India Ltd. (Currently known as HLS Asia Ltd.) is an oilfield services company, which provides petro-physical & completion solutions and services to its clients for the exploration and production of Hydrocarbons. On 04.05.1988 the assessee company entered into a contract with Oil India Limited (In short OIL) to provide "wire-line logging" and "perforation services" to the OIL. A similar contract was also entered into with the ONGC on 11.01.1989 In its Income Tax Returns filed for the assessment years we are concerned with, following claims were made by the assessee (only those claims which are subject matters of this litigation):- ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 2 of 52 <J·· 4. 5. A. Claim under section 32A of the Act- Investment allowance on New Plant and Machinery installed by the assessee in pursuant to aforesaid contracts. [Claims made in the assessment years 1989-90 & 90-91] B. Claim of deduction on "profit and gains" under section 80-IA (from AY 1991-92 to 1999-00) and 80-IB (from AY 2000-01 to 2003-04). [Section 80-IA was substituted by two sections - 80-IA and 80-18 - by the Finance Act, 1999 w.e.f. April 1, 2000.] C. Depreciation @ 100% under Rule 5, appendix I, Part 1, Ill (ix) of the Income Tax Rules, 1962. [For all the assessment years which we are concerned with] As for as claim of "investment allowance" under section 32A is concerned, which was made for assessment year 1989-90 and 1990-91 only and denied by the AO on the ground that the assessee fails to meet the requirements provided in sub-section (2) of section 32 A as the assessee is neither an industrial undertaking nor it is engaged in any manufacturing and production of any article or thing, the assessee succeeded before the CIT(A) and ITAT and the ITAT's order dated 10.08.1998 on this issue is a subject matter of dispute before us in ITA 627 of 2005 and ITA 194 of 2005. As for as the claim regarding deduction under section 80-IA is concerned, which is available in respect of profits and gains from ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 3of52 ([C1 industrial undertakings or enterprises engaged in infrastructure development, it was made for the first time in the assessment year 1991-92, but the same was denied by the AO on the similar grounds as the assessee, as per AO's view, is not an industrial undertaking engaged in manufacturing or producing an article or a thing. Though, this claim got an affirmative approval at the level of CIT (A), but the ITAT while hearing the appeals of the revenue pertaining to assessment years 1991-92 and 1992-93, restored the matter back to the desk of AO to verify as to whether the other conditions regarding 80-IA are satisfied because it has held in its own decision pertaining to assessment year 1989-90 and 1990-91 that the assessee is an industrial undertaking engaged in manufacturing or production of an article or thing for the purpose of section 32A. Claims regarding 80-18, as made in the assessment years 2000-01, 2001-02, 2002- 03 and 2003-04, were also denied by the AO on the ground that neither the assessee is an industrial undertaking nor it fulfills the basic criteria of employing certain number of persons as required by this section. Forming a contrary opinion against that formed by its predecessors in previous assessment years, the CIT(A) this time held that the assessee is not engaged in manufacturing or production of any article or thing. On appeal ITAT, following its own decision dated 23.09.99 restored the matter back to the ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 4of52 <lr' \C desk of AO. Since then, this cat and mouse game is on between the revenue authorities and the assessee and this issue has been a part of almost every appeal listed before us in the instant batch of appeals. 6. Regarding the claim of the assessee for higher depreciation on equipments used below the earth surface @ 100 % under Rule 5, appendix I, Part 1, Ill (ix) of the Income Tax Rules, 1962, the AO, from the very first assessment year i.e. 1989-90, was of the view that the same is available to a "mineral oil concern" only and the. activities of the assessee do not make it a mineral oil concern. This view of the revenue was reversed by the CIT(A) but on appeal, though the ITAT vide its order dated 10.08.1998 pertaining to assessment years 1989-90 and 1990-91 gave an in principle approval but the matter was restored back to the table of AO to verify as to whether the nature of the operations of these equipments is similar to those used by state run oil production companies. Subsequently, though OIL, an oil PSU certified the similarity of the equipments in question but the AO, on the ground of mobility of the assessee's equipments denied the claim. This order has been reversed by the CIT(A) and the CIT(A)'s order has got approval of ITAT vide its order dated 10.01.2002. Not only this order of the ITAT is challenged before ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 5of52 ) if! t I us in ITA 208/2002 but the previous order of the ITAT whereby it restored the matter to the desk of AO is also appealed against in ITA 627 of 2005 and ITA 194 of 2005. 7. In all these appeals similar questions of law came up for 8. consideration, though these were worded differently at different times of hearings. In the light of above discussion and considering the "substantial questions of law" admitted in the appeals which are part of the instant batch, two legal issues are clearly deducible for our consideration. These issues are as under: 1. Whether, on the facts and in the circumstances of the present case, the assessee can be said to be an "industrial undertaking" engaged in the business of "manufacturing or production of an article or a thing" for the purpose of section 32A and section 80-IA/80-IB of the Income Tax Act, 1961? 2. Whether, on the facts and in the circumstances of the present case, the assessee is entitled to a higher depreciation allowance @ 100% under Rule 5, appendix I, Part 1, Ill (ix) of the Income Tax Rules, 1962? We can now deal with aforesaid two legal issues separately one by one. The first issue is whether the production of log by the assessee, while providing wireline logging services to its clients, ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 6of52 amounts to manufacturing or production of an article or thing so as to place the assessee at per an industrial undertaking wherefrom it can be entitled to claim various tax incentives as available to these entities under the Act. 9. The Income-tax Act provides various incentives in different sections to the industrial under-takings. Under section 32A a new industrial undertaking can avail investment allowance provided it satisfies the conditions as laid down in sub section (2) thereof. This provision reads as under: Section 32A: Investment Allowance (1) ....................................... . (2) The ship or aircraft or machinery or plant referred to in sub- section(l} shall be the following, namely: (a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) any new machinery or plant installed after the 31st day of March, 1976,- (i) for the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 7of 52 I I ) 10. One of the main conditions under this provision, as applicable to a new industrial undertaking, is that the unit must be engaged in manufacturing or production of an article or a thing. Similarly, under section 80-IA deduction is allowed on profits and gains derived from an industrial undertaking. Though the word 'Industrial Undertaking' has been used many times in the Act but it has not been defined in various incentive provisions. It is only in S. 33B of the Act, that the definition of 'industrial undertaking' has been given by way of Explanation. In this Explanation, the definition of industrial undertaking has been given as akin to 'industrial company' which also includes processing. However, this definition is applicable only in the context of S. 33B whereby the rehabilitation allowance was granted in respect of assessment years 1984-85 and prior thereto. In old S. 801A before its substitution by Finance Act 1999, it was provided in the Explanation that 'industrial undertaking' had meaning assigned to it as provided in section 33B. However, in the new S. 801A or 5. 80IB as introduced by Finance Act, 1999, there is no similar provision defining the term 'industrial undertaking'. However, where the Section provides that the undertaking must . engage in manufacture or production of article or thing, whatever be the way the term industrial undertaking is interpreted; it does not make any difference. This is because in ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 8of52 such case the industrial undertaking must be engaged in manufa(:turing or production of article or thing. So even if the industrial undertaking were taken to mean processing or assembling activity, the unit would not be eligible for deduction unless it is proved that activity results into manufacturing or production of article or thing. Thus, the phrase !Manufacture or produce an article or thing' is of paramount importance under both the provisions of the Act. The term 'manufacture or production' has not been defined in the Act and has been interpreted differently in respect of different types of industries by the courts. fJ 11. In the instant case, the AO, while framing the assessment orders for the assessment years 1989-90 and 90-91, denied the claim made under section 32A as it was of the opinion that the assessee is "just converting into data something which is already there i.e. geo-physical properties of the earth crust which are already there are just being logged with the help of certain sophisticated equipments." The rationale behind this opinion was that "the term 'production' means that by the process something new must come into existence" and to qualify the test of 'manufacturing' there must be transformation resulting in a new and different article having distinctive name, character, and use. ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 9of52 q . ' In the view of the AO, the activities of the assessee i.e. production of data could be linked to a typewriter printing out letters on a sheet of paper or a rubber stamp giving impression on a sheet·of paper. 12. On appeal, the CIT(A) vide a common order dated 25.05.1992 pertaining to both the assessment years reversed the order of the AO and held that the assessee was an industrial undertaking within the meaning of s. 2(7)(c) of Finance Act 1981, and it was manufacturing within the meaning sub- section (2) of S. 32A of the Act. When the issue came before the ITAT, by way of an appeal filed by the revenue against the aforesaid order of the CIT(A), the ITAT vide its order dated 10/08/1998 upheld the order of the CIT(A). The relevant para of this order is as under: "We heard the parties at length and have perused the paper book filed before us. We find that the assessee-company derives its income from wire- line logging and perforation activities for exploration of oil. Wire-line logging is the standard process used to evaluate oil wells both at exploratory and development stage. The aforesaid perforating services are used at the development stage as an essential step in the actual recovery of oil specialised high technology electronic-cum- mechanic equipment is used for data collection. These specialised high-tech equipments termed as ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 10of52 ...___,' til 13. logging tools are sensitive sensor- electromechanical system working in hostile environment of extreme pressure and temperature. The data collected by these tools is transmitted uphole via an electromechanical cable. The data so processed on surface by an on- line computer which are recorded on digital mechanical tapes. After processing of the data, the computer gives an output termed as 'logs'. These are ideal tools for detailed description of an oil reservoir in terms of petro-physical characteristics geometrical orientation and layering. It is with these petro-physical characteristics that a thorough description of a reservoir emerges and it is based on these pictures the geologists decide to test the well. Further, vital informations are given to geologists for future exploration at the wells. We have further perused the wire-logging process as also the exact process of manufacturing log data logs placed by the assessee in his paper- books at p. 4.16 and at p. 4.17. In our considered opinion in such a situation it cannot be said that assessee is not an industrial undertaking. In view thereof, we find no infirmity either in CIT(A)'s findings or conclusion that assessee is an industrial undertaking. Hence, the Revenue fails and the CIT(A)'s order in directing AO to allow investment allowance on the plant and machinery used by it, is upheld." Claims regarding deduction under section 80-IA I 80-IB, which were made in the assessment year 1991-92 for the first time, were denied by the AO on the similar ground that the assessee is not an industrial undertaking engaged in manufacturing of an article or a thing. On appeal, CIT(A) reversed the order of the AO. ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 11of52 14. 15. \/ Feeling aggrieved, the revenue filed an appeal before the ITAT, which by a common order dated 23.09.99 pertaining to assessment years 1991-92 and 1992-93 held that the issue whether the assessee is an industrial undertaking engaged in manufacturing of an article or a thing is settled in the favour of the assessee in the light of ITAT's order dated 10th August 1998. However, it reverted back the matter back to the desk of AO to find out whether other conditions as required under section 80-IA are fulfilled. Since then this issue has travelled to the ITAT level in every assessment year either under section 80-IA (till AY 1999- 00) or under 80-IB (from AY 2000-01 to 03-04), which in turn, every time, has followed the decision of ITAT dated 23.09.99 and reverted the matter back to the table of AO to find out as to whether other requirements are satisfied. Hence comes this appeal to us on this issue. Ld counsel for the respondent assessee Mr. Ajay Vohra ha·s submitted before us that the assessee is an industrial undertaking engaged in the business of retrieving and producing valuable information in respect of the sub-terranean of the oil fields of mineral oil concern. He has fervently pleaded that the printed logs and statements being final product of data processing amounts to manufacturing of an article or a thing to ITA Nos.194/2005, 208/2002 & Ors. Connected Matters Page 12of52 it satisfy the statutory requirement in regards to the concerned claims made by the assessee. In order to fortify his case, a plethora of judicial decisions have been cited before us by the Ld. counsel for the assessee to support the contention that the "activity carried on by the assessee with respect of collecting and transmitting of data amounted to manufacturing and producing of an article or thing". During the course of arguments, a specifically emphasized limb of his argument has been the analogy between the production of logs by using wireline logging equipments on the one hand and the production of X-Ray and ultrasound report sheets using X-Ray and Ultrasound machines on the other hand which have been held to be eligible for investment allowance under section 32A in various judicial pronouncements. 16. Following judgments have been cited by the learned counsel for the assessee to support its contention: 1. 2. 3. 4. 5. 6. 7. 8. CIT Vs. IBM World Trade Corporation [130 ITR 739· (Born)] CIT Vs. Datacons (P} Ltd. (1985) 155 ITR 66 CIT Vs. Peerless Consultancy Services Pvt. Ltd. [186 ITR 609 (Cal)] CIT Vs. Shaw Wallace and Co. Ltd. [201 ITR 17 (Cal) Ship Scrap Traders Vs. CIT [251 ~TR 806 (Born)] CIT Vs. Emirates Commercial Bank Ltd. [ 262 ITR 55 (Born)] CIT Vs. Professional Information Systems and Management. [274 ITR 242 (Guj)] CIT Vs. Oracle Software India Ltd. [320 ITR 546 (SC)] ITA Nos. 194/2005, 208/2002 & Ors. Connected Matters Page 13of52 Uf' --~.------ 17. In the case of l.B.M. World Trade Corporation (supra) the question before the Bombay High Court was as to whether E.A. Machines (now called Data Processing Machines) were office appliances not eligible for allowance of development rebate under section 33(1) of the Act. The Court held that the word 11appliances" is qualified by the word 11 office" in Section 33 and those words as they are used in section 33 will, therefore, have to be construed in the context of appliances which are generally used in an office as an aid or a facility for the proper functioning of the office. The Court observed that a computer system or an electronic data processing system is physically a collection of electromechanical and electronic components and devices assembled in metal cases (modules) and cabinets. These contain switching and communication components such as transistors, diodes, capacitors, resistors and integrated circuits, all combined into various types of circuitry, together with memory systems, power supplies , delay lines and various types of magnetic media such as tapes and wires for carrying and transforming data and information, as coded, into instructions and computations. The court further observed that a data processing machine is complicated machinery which could not be easily operated by lay men and special training for a period which may exceed three ITA Nos. 194/2005, 208/2002 & Ors. Connected Matters Page 14of52 ·~~~ -....-. ____.w1rr1~1.,w.-..1-w1.----.-- ~1t-w-01--.w~1 ----.-.w--..w--...-w -------y-r --- - - -- - -- ---~----~ ----.-~ ------ -~ ... - ..-. -·-·· -....-~~ - ·---- ----------- -------- -) ) months in some cases and a much longer period in others is necessary in order to equip a person with the knowledge and art of operating these machines. The installation and operation of the machines is on a scientific basis and even for the purposes of installation, certain special conditions have to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which can be described as computers, are used are well-known and, in highly scientifically developed systems, they have their own role to play and they cannot be equated with office appliances which would be of a much simpler nature. The Court held that in view of the varied functions which the "system" is capable of performing, data ,.]) processing machines cannot be classified as "office appliances" and are eligible for allowance of development rebate under section 33(1) of the Act. 18. In the case of Datacons (P) Ltd. (supra) the assessee was carrying on the activity of processing data furnished by its customers by using IBM Unit Record Machine Computers. The question before the Karnataka High Court was whether the Appellate Tribunal was correct in law in treating the assessee either as a manufacturer of goods or as engaged in the processing of goods within the meaning of section 2(7)(c) of the ITA Nos. 194/2005, 208/2002 & Ors. Connected Matters Page 15of52 1) \1D I .. _ 19. Finance (No. 2) Act, 1977. The Court observed that the term 11 industrial company" has been described as including a company engaged in the processing of goods. The Court discussed at length the activities carried out by the company while processing the data and held as follows: "It will be clear from these activities that the assessee receives vouchers and statements of accounts from the customer and they are converted into the required balance-sheet, stock account, sales analysis, etc. They are got printed as per the requirements of the customer. In all these activities, the assessee has to play an active role by co-ordinating the activities and collecting the information. Such activities, in our opinion, could fairly fall within the concept of processing of goods, if not manufacture of goods." The Karnataka High Court observed that the Gujarat High Court in case of CIT Vs. Ajay Printery Private Ltd. (1965) 58 ITR 811 had gone a step further and held that the printing balance- sheets, profit and loss accounts, dividend warrants, pamphlets, share certificates, etc., required by companies is a business which consists wholly of "manufacture of goods" within the meaning of clause (ii) of Explanation 2 to section 23A of the Income-tax Act, 1922. Peerless Consultancy Services Pvt. Ltd. (supra) is a case where the assessee was engaged in the business of providing technical and industrial consultancy. Along with the above activities it was ITA Nos. 194/2005, 208/2002 & Ors. Connected Matters Page 16of52 -) '---, also undertaking electronic data processing on the basis of computers. While dealing with the issue as to whether the assessee was an industrial company within