M/S POLYFLEX (INDIA) PVT. LTD. versus THE COMMISSIONER OF INCOME TAX & ANOTHER on 17 November 2022

1. Feeling aggrieved and dissatisfied with the impugned judgmentand order dated 25.02.2014 passed by the High Court of Karnataka atBengaluru in Income Tax Appeal No. 623/2007, by which the High Courthas allowed the said appeal preferred by the Revenue, the assessee haspreferred the present appeal.

2. The facts leading to the present appeal in nutshell are as under:

That the appellant – assessee is having a manufacturing unit atPune in which the appellant – assessee is manufacturing ‘polyurethanefoam,’ which is ultimately used as automobile seat. The assessee filedits return of income for the assessment year 2003-04 and claimeddeduction under Section 80-IB of the Income Tax Act (for short, ‘ITAct’). The assessing officer disallowed the deduction under Section 80-IB of the IT Act by observing that the nature of the business of theassessee is “manufacturer of polyurethane foam seats” which falls underentry 25 to the Eleventh Schedule of the IT Act and therefore the assesseeshall not be entitled to deduction under Section 80-IB. However, it wasthe case on behalf of the assessee that different sizes of polyurethanefoam are used as automobile seats and therefore the end product can besaid to be the automobile seat which is different than the polyurethanefoam and therefore the same does not fall under entry 25 to the EleventhSchedule of the IT Act. However, the assessing officer did not accept A

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Athe same by observing that as ‘polyurethane foam’ is made of Polyoland Isocyanate and other components, the deduction under Section 80-IB of the IT Act cannot be given to the assessee-company as Section80-IB(2)(iii) states that the benefit of deduction under the said sectioncannot be given if the assessee manufactures or produces any article orthing specified in the list in the Eleventh Schedule of the IT Act.B

2.1 The assessee preferred an appeal before the Commissionerof Income Tax (Appeals) (for short, ‘CIT(A)) against the assessmentorder. The CIT(A) upheld the order of the assessing officer. The CIT(A)observed that the two chemicals, namely, Polyol and Isocyanate used inthe manufacture of polyurethane foam seats assemblies were the basicCingredients of polyurethane foam and therefore the case would squarelyfall in what is specified in the Eleventh Schedule.

2.2 Against the order of the CIT(A), the Assessee filed an appealbefore the Income Tax Appellate Tribunal (for short, ‘ITAT’). The ITATset aside the assessment order as well as the order passed by the CIT(A)Dand allowed the appeal filed by the assessee by observing thatpolyurethane foam was neither produced as a final product nor is anintermediate product nor is a by-product by the assessee and the samewas used as automobile seat and therefore does not fall within entry 25to Eleventh Schedule of the IT Act and therefore the assessee shall beEentitled to claim deduction under Section 80-IB of the IT Act. The orderpassed by the ITAT has been set aside by the High Court, by the impugnedjudgment and order specifically observing that what is manufactured bythe assessee is polyurethane foam in different sizes/designs and there isno further process undertaken by the assessee to convert it into automobileseats and therefore what is manufactured by the assessee is polyurethaneFfoam falling in entry 25 to Eleventh Schedule and therefore the assesseeshall not be entitled to deduction claimed under Section 80-IB of the ITAct. Consequently, the High Court has allowed the appeal preferred bythe revenue and has quashed and set aside the order passed by theITAT and has restored the assessment order denying the deductionGclaimed under Section 80-IB of the IT Act. The impugned judgment andorder passed by the High Court is the subject matter of present appeal.

3. Shri Preetesh Kapur, learned Senior Advocate has appearedon behalf of the assessee and Shri Balbir Singh, learned AdditionalSolicitor General of India has appeared on behalf of the revenue.

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3.1 Shri Preetesh Kapur, learned counsel appearing on behalf ofthe assessee has vehemently submitted that when on appreciation of theentire evidence on record and after considering the process undertakenby the assessee and after considering the fact that the end product wasautomobile seat, the ITAT allowed the appeal and held that the assesseeis entitled to claim deduction under Section 80-IB of the IT Act, thesame was not required to be interfered with by the High Court.

3.2 It is submitted that the relevant pre-condition for the assesseeto be eligible for the benefit under Section 80-IB of the IT Act in thepresent case is that the final product manufactured and sold by theassessee ought not to have an article classifiable in the Eleventh Schedule.It is submitted that the final product manufactured by the assessee is notpolyurethane foam, but automobile seat in which polyurethane foam isused. It is submitted that the learned ITAT returned a categorical findingof fact that the final product manufactured by the assessee is automobileseat in which polyurethane foam is used. It is submitted that if that be so,the manufactured item shall not come within any of the entry of EleventhSchedule and therefore the assessee shall be entitled to deduction underSection 80-IB of the IT Act.

3.3 It is submitted that in fact the assessee received orders forsupply of automobile seats and even paid the sales tax as automobileseats. It is submitted that the final product is commercially distinct frompolyurethane foam.

3.4 It is submitted that the High Court ought to have appreciatedthat in fact in assessee’s own case in respect of the very same product,in relation to classification for the purposes of payment of excise duty,the CEGAT has observed that the product manufactured by the assesseecan never be said to be known in trade parlance as articles ofpolyurethane foam and hence cannot be classified as polyurethane foam.It is submitted that the order passed by the CEGAT had attained finality.It is submitted that therefore once the articles/goods manufactured cannotbe classified as polyurethane foam under the Excise Act, the same cannotbe treated and/or considered as polyurethane foam under the IT Act.

3.5 It is submitted that in the present case the Tribunal noted indetail the elaborate manufacturing process undertaken by the assesseewhereby the final product, namely, car seats are manufactured. It issubmitted that after elaborating the process, the Tribunal has returned a A

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Afinding of fact that the said process clearly results in the emergence of afinal product which is commercially distinct and different frompolyurethane foam and is known in the market as car seats and not aspolyurethane foam.

3.6 It is submitted that the High Court has reversed the decisionBof the ITAT without even noticing the above process or the CEGAT’sorder and also without giving any reason as to how the above finding offact was perverse. It is submitted that at no stage the department hasdenied that the final product sold by the assessee is the car seat.

It is further submitted that it is a settled position of law that theCmoment a commercially distinct commodity, known in trade parlance bya different name and having a different use, comes into being, it ceasesto be classifiable as the raw material/ingredient from which it is made.

3.7 It is further submitted by Shri Preetesh Kapur, learned counselappearing on behalf of the assessee that entry 25 of Eleventh ScheduleDspecifically talks about “latex foam sponge and polyurethane foam” andit does not talk about the “latex foam sponge and polyurethane foampreparations” and/or items and/or articles made from the aforesaid foam.It is submitted that whenever the legislature wanted, there is a specificentry like entry 2 and 3 in which it is specifically mentioned “tobaccoand tobacco preparations and cosmetics and toilet preparations”. It isEsubmitted therefore that when the final product is automobile seat andthe polyurethane foam loses its characteristics which is used as ingredient,the assessee shall be entitled to deduction under Section 80-IB of the ITAct.

3.8 Making the above submissions and relying upon the decisionsFof this Court in the cases of Commissioner of Income Tax, Madras v.Vinbros and Company, (2015) 14 SCC 483 and Commissioner ofIncome Tax-I, Mumbai v. Hindustan Petroleum Corporation Limited,(2017) 15 SCC 254, it is prayed to allow the present appeal.

4. Shri Balbir Singh, learned ASG appearing on behalf of theGrevenue has vehemently submitted that what is manufactured by theassessee is polyurethane foam in different shapes/designs and what issold is different sizes/designs of polyurethane foam which ultimately isbeing used by the assembly operator for manufacturing of car seats/automobile seats and the same is used as ingredient and after the processof moulding etc., the seats are manufactured. It is submitted thatH

therefore, by no stretch of imagination, it can be said that the assessee ismanufacturing and selling automobile seats. It is submitted that what ismanufactured and sold is the polyurethane foam which is manufacturedby using two chemicals Polyol and Isocyanate.

4.1 It is submitted that the High Court has specifically observedand held that except manufacture of polyurethane foam which ismanufactured by injecting two chemicals, there is no further processundertaken by the assessee. It is submitted that as rightly observed bythe High Court the assessee produces the polyurethane foam seats whichare used for making end product to be fixed in different vehicles. It issubmitted that the assessee as such is not manufacturing the end product,namely, automobile seats to be fixed in the vehicles. For the aforesaid,Shri Balbir Singh, learned ASG has taken us to the findings recorded bythe CIT(A) and has submitted that after considering the detailed processundertaken by the assessee, the CIT(A) opined that the assessee is notthe manufacturer of the car seats and what is manufactured is thepolyurethane foam which is being sold in different designs/shapes/sizes.

4.2 It is submitted that therefore as the assessee is manufacturingpolyurethane foam which falls under entry 25 of the Eleventh Scheduleand therefore considering Section 80-IB(2)(iii), the assessee shall not beentitled to deduction under Section 80-IB of the IT Act. It is submittedthat therefore the impugned judgment and order passed by the HighCourt is not required to be interfered with.

5. We have heard learned counsel for the respective parties atlength.

6. The short question which is posed for the consideration of thisCourt is, “whether the assessee is eligible for the benefit under Section80-IB of the IT Act?”

7. The assessee shall not be eligible for the benefit under Section80-IB of the IT Act if it is found that the articles and/or goodsmanufactured by the assessee do not fall and/or classifiable underEleventh Schedule. According to the revenue, the assessee ismanufacturing polyurethane foam which falls under the EleventhSchedule. However, it is the case on behalf of the assessee that the finalproduct manufactured and sold by the assessee is automobile seats/carseats which is other than the manufacture of polyurethane foam.

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A8. By the impugned judgment and order, the High Court hasspecifically observed and held that what is manufactured and sold bythe assessee is polyurethane foam which is manufactured by injectingtwo chemicals, namely, Polyol and Isocyanate and the polyurethane foamwhich is manufactured by the assessee is used as ingredient formanufacture of automobile seats. The assessee is manufacturingBpolyurethane foam and supplying the same in different sizes/designs tothe assembly operator, which ultimately is being used for car seats. Theassessee is not undertaking any further process for end product, namely,car seats. The polyurethane foam which is supplied in different designs/sizes is being used as ingredient by others, namely, assembly operatorsCfor the car seats. Merely because the assessee is using the chemicalsand ultimately what is manufactured is polyurethane foam and the sameis used by assembly operators after the process of moulding as car seats,it cannot be said that the end product manufactured by the assessee iscar seats/automobile seats. There must be a further process to beundertaken by the very assessee in manufacturing of the car seats. NoDfurther process seems to have been undertaken by the assessee exceptsupplying/selling the polyurethane foam in different sizes/designs/shapeswhich may be ultimately used for end product by others as car seats/automobile seats.

9. So far as the reliance placed upon the decisions of this Court inEthe cases of Vinbros and Company (supra) and Hindustan PetroleumCorporation Limited (supra), relied upon by the learned counselappearing on behalf of the assessee is concerned, the same shall not beapplicable to the facts of the case on hand and/or the same shall not beof any assistance to the assessee in view of the findings recordedFhereinabove.

10. In view of the above when the articles/goods which aremanufactured by the assessee, namely, polyurethane foam is an articleclassifiable in the Eleventh Schedule (entry 25), considering Section 80-IB(2)(iii), the assessee shall not be entitled to the benefit under SectionG80-IB of the IT Act. The High Court has rightly held so and has rightlyset aside the order passed by the ITAT and has rightly restored the orderpassed by the assessing officer denying the deduction/benefit claimedunder Section 80-IB of the IT Act. We are in complete agreement withthe view taken by the High Court and that of the assessing officer,confirmed by the CIT(Appeals).H

11. In view of the above and for the reasons stated above, thepresent appeal fails and the same deserves to be dismissed and isaccordingly dismissed. However, there shall be no order as to costs.

Ankit Gyan(Assisted by : Rahul Rathi, LCRA)

Appeal dismissed.

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