-Report by Akshita Singh
The Supreme Court, in M/S POLYFLEX (INDIA) PVT. LTD. V THE COMMISSIONER OF INCOME TAX & ANR, held and has appropriately set aside the request passed by the ITAT and has indeed restored the proposal passed by the assessing official denying the deduction asserted under Section 80-IB of the IT Act, henceforth declaring the appeal declared to be dismissed.
FACTS OF THE CASE:
In its production facility in Pune, the appellant produces “polyurethane foam,” which is ultimately used to make car seats. Deduction was requested under Income Tax Act (also known as the “IT Act”) Section 80-IB in the appellant’s income tax return for the assessment year 2003–2004. Because the appellant is a “manufacturer of polyurethane foam seats,” which is covered by entry 25 of the IT Act’s Eleventh Schedule, the assessing officer denied the appellant’s request for deduction under Section 80-IB of the IT Act. As a result, the appellant was declared ineligible for the deduction. Although different sizes/designs of polyurethane foam are used to make car seats, it is the appellant’s stance that the finished product—an automobile seat—is distinct from the polyurethane foam and does not, therefore, fall under entry 25 to the Eleventh Schedule of the IT Act. The assessing officer rejected the claim, noting that because “polyurethane foam” is made of polyol, isocyanate, and other ingredients, Section 80-IB(2)(iii) of the IT Act prohibits the appellant-company from receiving the benefit of the deduction as it manufactures or produces the items listed in the list in the Eleventh Schedule of the IT Act.
To challenge the assessment order, the appellant filed an appeal with the Commissioner of Income Tax (Appeals) (abbreviated “CIT(A)”). The CIT(A) upheld the assessing officer’s decision. The CIT(A) noted that because the two chemicals, Polyol and Isocyanate, employed in the production of polyurethane foam seat assemblies were the essential components of polyurethane foam, the case would naturally come under the guidelines enumerated in the Eleventh Schedule. The Appellant filed an appeal with the Income Tax Appellate Tribunal (also known as “ITAT”) in opposition to the CIT(A)’s ruling. The ITAT overturned the assessment order as well as the CIT(A) order and granted the appellant’s appeal, noting that polyurethane foam was used as an automobile seat and was neither produced as a final product nor an intermediate product nor a by-product by the appellant, so it does not fall under entry 25 to the Eleventh Schedule of the IT Act. As a result, the appellant was eligible to claim a deduction under Section 80-IB. The High Court specifically noted in the impugned judgment and order that what the appellant manufactures is polyurethane foam in different sizes/designs and that there is no further process undertaken by the appellant to convert it into automobile seats, so polyurethane foam being manufactured by the appellant falls in entry 25 to Eleventh Schedule, therefore, the appellant shall not be entitled to any relief under the ITAT order.
When the ITAT allowed the appeal and determined that the appellant was entitled to claim a deduction under Section 80-IB of the IT Act after appreciating all of the evidence on file, taking into account the process used by the appellant, and considering the fact that the end product was an automobile seat, Shri Preetesh Kapur, appearing on behalf of the appellant, has argued that this decision did not require interference from the High Court. He further asserted that entry 25 of the Eleventh Schedule refers to “latex foam sponge and polyurethane foam” and did not refer to “latex foam sponge and polyurethane foam preparations” or items or articles made from the aforementioned foam. There is a specific entry for that, such as entries 2 and 3, where it is specifically mentioned “tobacco and tobacco preparations and cosmetics and toilet preparations,” according to the argument made. Therefore, it was proposed that the appellant shall be entitled to a deduction under Section 80-IB of the IT Act because the polyurethane foam used as an ingredient in the end product, an automotive seat, loses some of its original properties.
When speaking on behalf of the revenue, Shri Balbir Singh vehemently asserted that the appellant manufactures and sells polyurethane foam in a diverse range of sizes and designs, which is ultimately used by the assembly operator to manufacture seats of cars and other vehicles as an ingredient after going through the moulding and other manufacturing processes, therefore, the appellant cannot be producing and selling car seats. It was asserted that the polyurethane foam that was being produced and sold was made utilizing the chemicals polyol and isocyanate.
The court held that the final product manufactured by the appellant was automobile seats merely because the appellant uses the chemicals and ultimately what was being manufactured is polyurethane foam and the same is used by assembly workers after the process of moulding as car seats. The appellant itself must carry out a further step in the car seat manufacturing process. Other than providing or selling polyurethane foam in various sizes, forms, and shapes that may ultimately be used as end products by others as car seats or automobile seats, the appellant does not appear to have engaged in any additional processes therefore, according to Section 80-IB(2)(iii), the appellant is not eligible for the benefit under Section 80-IB of the IT Act.