Gamma Pizzakraft (P) Ltd.,, New Delhi vs Department Of Income Tax

Appellant by : Shri T. Vasanthan Sr. DR Respondent by : Shri Suresh Malik CA

Date of hearing: 11/03/2015. Date of order : 23/03/2015.

ORDER

PER S.V. MEHROTRA, A.M:-

This appeal, preferred by the Revenue, is directed against CIT(A)'s order dated 21-01-2013 relating to A.Y. 2009-10.

2. The assessee filed its return of income declaring loss of Rs. 77,22,083/-. The assessment was completed after making following two additions/ disallowances:

(i) Disallowance of Rs. 3,28,374/- on account of additional depreciation;

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(ii) Disallowance of Rs. 8,12,054/- on account of capitalization of continuing fees/ royalty expenses @ 25% out of total expenditure of Rs. 32,48,219/-.

2.1. The assessee preferred appeal before ld. CIT(A), who allowed the

asessee's appeal.

2.2. Being aggrieved with the order of ld. CIT(A), the department is in

appeal before us and has taken following effective grounds of appeal:

"1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs. 3,28,374/- made by the AO on account of additional depreciation.

2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs. 8,12,054/- made by the AO on account of capitalization of continuing fees/ royalty expenses @ 25% out of total expenditure of Rs. 32,48,219/-.

3. At the time of hearing, ld. counsel for the assessee submitted that identical disallowances were made in earlier years which have been deleted by ld. CIT(A) and against the ld. CIT(A)'s order, the Tribunal dismissed the revenue's appeal.

4. Brief facts of the case are that assessee company was carrying on a food and beverage business through restaurant, home and office delivery, catering and dispensing of pizzas, pastas, health food and other food and beverages prescribed. The assessee had claimed additional depreciation of Rs. 3,28,374/- on the ground that it was engaged in the manufacture or production of food articles which were different from raw material. The 3 ITA 2123/Del/2013

AO denied the assessee's claim. However, ld. CIT(A) deleted the disallowance.

5. Having heard both the parties we find that ld. CIT(A) following orders for AY 2006-07, 2007-08 and 2008-09, allowed the assessee's claim. We find that on revenue's appeal for AY 2008-09, the ITAT has observed as under:

"3.3. Apropos the additional depreciation ld. Counsel contends that pizzas, pastas manufactured by the assessee are different commercial commodities than the raw-material used therein like flour, oil, yeast, baby corn, various vegetables/ non-vegetables, spices etc. In this behalf the assessee uses fresh vegetables which are cut down to particular sizes after sanitizing. All the vegetables are kept in a chiller (1-4 degree Celsius). After opening the canned products, these are kept in the chiller. Frozen products, on the other hand, involves a 3 days thawing process. The frozen topping is kept in deep freezer at the same temperature. From here, packets are taken for thawing in chiller (1-4 degree Celsius). The toppings get ready to use in 3 days. The shelf life of all the toppings is only 4 hours.

3.4. On receiving orders from the customer, pizzas are prepared using desired toppings and put in ovens. All veg and non-veg toppings, sauces and cheese are kept in different bins at a defined temperature and are served according to order.

3.5. Likewise for manufacturing of pasta, a generic term for Italian variants of noodles, food made from dough of flour, water and/ or eggs that is boiled. It is a traditional Italian preparation made up of water, oil and flour and takes the name of its shape. The assessee company manufactures to types of pastas; oven baked and sautéed pastas.

3.6. Ld. Counsel relied on Finance (No. 2), Act 2009, brought on statute w.e.f. 1-4-2009, a definition of the term "manufacturing" by inserting a new clause (29 BA) to section 2 as under:

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"(29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing, -

(a) Resulting in transportation 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."

The above amendment is clarificatory in nature. In view of the above definition, the food items produced by the appellant get covered in sub-

clause (a) of the clause (29BA) of Section 2.

Accordingly, the various catering activities carried out by the appellant including making of pizza, pasta and other food items are held to be "manufacturing" in nature.

8.8. From the manufacturing process started above one can easily conclude that the process of making pizza and pasta by the appellant company is a step-wise systematic process, which is strictly in accordance with the specification of the processes required by the Licensor and hence the appellant is eligible for claim of additional depreciation accordingly.

3.7. Reliance is placed on ITAT Ahmedabad Bench in the case of Deepkiran Foods (P) Ltd. Vs. ACIT 155 TTJ 57, holding that the assessee 's business of preparing food items like pratha, samosa, dhokla amount to manufacture and income was eligible for deduction u/s 10B. The ITAT besides relying on catena of judgments distinguished the applicability of ratio of decision in the case of Indian Hotels Ltd. Vs. ITO & others 112 Taxman 48 (SC) by following observations:

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"13. On the basis of material on record, we find that the assessee has claimed deduction u/s 10B in the past assessment years and the claim of the assessee was allowed while framing the assessments framed u/s 143(3) and the assessments have attained finality. It was submitted that there was no change in the facts in the year under appeal as compared to the facts of earlier years.

This fact has not been controverted by the Ld. D.R. by bringing any contrary material on record.

We further find that the Hon'ble J.K. High Court in the case of Pankaj Jain (supra) after distinguishing the Hon'ble Apex Court in the case of Indian Hotels (supra) has held the manufacture of bread to be a manufacturing activity.

Thus, in view of the totality of facts of the case, we hold that the issue before us is covered with the decision of Hon'ble J.K. High Court in the case of Pankaj Jain Prop Aagan Food Industries (supra) in favour of the assessee and we are of the view that the assessee is an industrial undertaking and the activity of production of the foodstuff is a manufacturing activity (except for the items outsourced from other parties)."

3.8. Further reliance is placed on the ratio of decision of Hon'ble Madras High Court in the case of CIT Vs. M.R. Gopal 58 ITR 598 (Mad.), holding as under:

"Manufacture" means: "Anything made from raw materials by the hand, by machinery, or by art, as clothes, iron utensils, shoes, machinery etc.; a manual occupation or trade to produce by labour especially now, according to an organized plan and with division of labour and usually with machinery". It seems unarguable having regard to 6 ITA 2123/Del/2013

the meaning of manufacture that the process employed in converting boulders into small chips of stones with the aid of labour and machinery is not a manufacturing process. Surely labour is employed and something is converted into something else, a product which is of value and is used, and in that sense the chips are a new production as a result of a manufacturing process."

3.9. Thus, the assessee's activity is of manufacture and production of article or thing and therefore additional depreciation is allowable.

4. Ld. DR relied on the order of assessing officer.

5. We have heard rival submissions and gone through the entire material available on record. Apropos the issue of royalty, the ITAT in earlier years has decided the same in favour of the assessee. Respectfully following the same, we dismiss ground no. 1 raised by the revenue."

5.1. Apropos ground no. 1, i.e. additional depreciation, in our considered opinion relevant aspect of the issue stands decided by the coordinate Bench of the ITAT in the case of Deepkiran Foods (P) Ltd. (supra) in which the manufacturing of eatables like paratha, samosa, dhokla have been held to be a manufacturing process. In this judgment the ratio of decision of Hon'ble Supreme Court in the case of Indian Hotels Ltd. (supra), relied upon by the assessing officer has been has been considered and held to be on distinguishable facts. The assessing officer has held that eatables retained the characteristics of original ingredients. This assumption has been categorical dislodged by ITAT Ahmedabad Bench by holding that the raw material being in the form of wheat, potato etc. are totally different which is a new commercial commodity called by various names and distinctly sold in the market. Respectfully following the same we hold that the assessee is engaged in the activities of production and manufacture of 7 ITA 2123/Del/2013

article or thing and is eligible for additional depreciation. This ground of the revenue is dismissed."

5.1. The facts being identical in the present assessment year, respectfully following the decision for AY 2008-09, it is held that since the assessee was engaged in the activities of production/ manufacturing of an article or thing, therefore, was eligible for additional depreciation. This ground of revenue is dismissed.

6. Brief facts, apropos ground no. 2, are that during the year under consideration the assessee had claimed royalty expenses/ continuing fees amounting to Rs. 32,48,290/-. Relying on the decisions of Hon'ble Supreme Court in the cases of Ssouthern Switch Gear Ltd. Vs. CIT 232 ITR 359; and Jonas Woodhead and Sons (India) Ltd. Vs. CIT 224 ITR 342 (SC), the AO held that these expenses were to be capitalized. He, accordingly, disallowed 25% of the aforesaid expenditure being capital expenditure and added the same to the total income f the assessee.

6.1. In appeal, the ld. CIT(A) following the order for AYs 2006-07, 2007-08 and 2008-09, allowed the claim of the assessee holding that the license fee/ royalty paid by the assessee was revenue in nature. Aggrieved, the revenue is in appeal before us.

7. Having heard both the parties we find that in AY 2008-09 the Tribunal vide its order dated 30-4-2014 (supra) has dismissed the revenue's appeal by observing as under:

"5. We have heard rival submissions and gone through the entire material available on record. Apropos the issue of royalty, the ITAT in earlier years has decided the same in favour of the assessee. Respectfully following the same, we dismiss ground no. 1 raised by the revenue."

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7.1. Since the facts are identical with earlier years, therefore, we do not find any reason to interfere with the findings of ld. CIT(A) on this issue, particularly because the assessee got a limited license to use the system for specified outlet only and the assessee did not have any right to transfer the license nor could sub- license. Further, the licensor had the right to entry to safeguard the system licensed to the assessee. Further, the assessee was liable to pay a fixed percentage of its sale as license fee to the licensor. Thus, ld. CIT(A), considering these facts, rightly observed that assessee had not received any permanent or enduring benefit through such license, which was limited to use by the assessee in the prescribed manner and liable to be rescinded by the licensor in certain conditions. Accordingly, we uphold the order of ld. CIT(A) on the issue in question. Ground is dismissed.

8. In the result, revenue's appeal is dismissed.

Order pronounced in open court on 23/03/2015..

Sd/- Sd/- (C.M. GARG) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 23/03/2015. *MP* Copy of order to: 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, New Delhi.