Supreme Court Denies Tax Deduction for Polyurethane Foam Manufacturer: M/s Polyflex (India) Pvt. Ltd. vs. Commissioner of Income Tax (2022)

Date of the Judgment: November 17, 2022
Citation: M/s Polyflex (India) Pvt. Ltd. vs. The Commissioner of Income Tax & Another Civil Appeal No. 8260 of 2022
Judges: M.R. Shah, J. and M.M. Sundresh, J.

Can a company that manufactures polyurethane foam, which is then used in car seats, claim tax deductions under Section 80-IB of the Income Tax Act, 1961? The Supreme Court of India addressed this question in a recent judgment, focusing on whether the company’s final product was polyurethane foam or automobile seats. The court ultimately ruled against the company, stating that the company was manufacturing polyurethane foam, an item listed in the Eleventh Schedule of the Income Tax Act, 1961, thus disqualifying it from the tax deduction. The bench comprised Justices M.R. Shah and M.M. Sundresh, with the majority opinion authored by Justice M.R. Shah.

Case Background

M/s Polyflex (India) Pvt. Ltd., the appellant, operates a manufacturing unit in Pune where it produces polyurethane foam, a key component in automobile seats. For the assessment year 2003-04, the company filed its income tax return, claiming a deduction under Section 80-IB of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed this deduction, arguing that the company’s business was the “manufacturer of polyurethane foam seats,” which falls under entry 25 of the Eleventh Schedule of the IT Act, thereby making them ineligible for the tax benefit. The company contended that they were manufacturing automobile seats, not just polyurethane foam, and therefore should be eligible for the deduction. The AO rejected this claim, stating that since polyurethane foam is made from Polyol and Isocyanate, it falls under the Eleventh Schedule, which disqualifies them from the deduction under Section 80-IB of the IT Act.

Timeline

Course of Proceedings

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the Assessing Officer’s decision, agreeing that the basic ingredients used in making the foam were Polyol and Isocyanate, thereby placing the product under the Eleventh Schedule. However, the Income Tax Appellate Tribunal (ITAT) overturned these decisions, ruling that the polyurethane foam was not the final product of the company, but rather an intermediate component used in automobile seats. The ITAT concluded that the company’s final product, automobile seats, did not fall under the Eleventh Schedule, entitling them to the deduction under Section 80-IB of the IT Act. The High Court of Karnataka at Bengaluru reversed the ITAT’s decision, stating that the company only manufactured polyurethane foam in various sizes and designs, without any further process to convert it into automobile seats. The High Court, therefore, restored the Assessing Officer’s order, denying the tax deduction. The present appeal is against the order of the High Court of Karnataka at Bengaluru.

Legal Framework

The core of the dispute revolves around Section 80-IB of the Income Tax Act, 1961, which provides tax deductions to certain industrial undertakings. However, Section 80-IB(2)(iii) of the Income Tax Act, 1961, specifies that this deduction is not applicable if the assessee manufactures or produces any article or thing specified in the list in the Eleventh Schedule of the IT Act. Entry 25 of the Eleventh Schedule of the IT Act includes “latex foam sponge and polyurethane foam.” The key legal question is whether the appellant’s final product is polyurethane foam (as claimed by the revenue) or automobile seats (as claimed by the assessee). The relevant provision is as follows:

Section 80-IB(2)(iii) of the Income Tax Act, 1961 states that the benefit of deduction under the said section cannot be given if the assessee manufactures or produces any article or thing specified in the list in the Eleventh Schedule of the IT Act.

Arguments

Appellant’s Arguments:

• The appellant argued that the final product is not polyurethane foam but automobile seats, which use polyurethane foam as a component.
• The Income Tax Appellate Tribunal (ITAT) had correctly found that the final product was automobile seats, and this finding should not have been overturned by the High Court.
• The appellant receives orders for and pays sales tax on automobile seats, indicating that their final product is commercially distinct from polyurethane foam.
• The Central Excise and Goods Appellate Tribunal (CEGAT) had previously ruled that the appellant’s product could not be classified as polyurethane foam for excise duty purposes.
• The appellant’s manufacturing process results in a final product that is commercially distinct and known in the market as car seats, not polyurethane foam.
• The entry 25 of the Eleventh Schedule of the IT Act specifically mentions “latex foam sponge and polyurethane foam” and not “latex foam sponge and polyurethane foam preparations” or items made from the foam.

Revenue’s Arguments:

• The revenue contended that the appellant manufactures polyurethane foam in different shapes and designs, which is then used as an ingredient in the production of car seats by assembly operators.
• The appellant does not undertake any further process to convert the foam into car seats; they only supply polyurethane foam in various sizes and shapes.
• The High Court correctly observed that the appellant produces polyurethane foam seats, which are used by others to make the end product.
• The CIT(A) had rightly concluded that the appellant is not the manufacturer of car seats but of polyurethane foam.
• Since polyurethane foam is listed in the Eleventh Schedule of the IT Act, the appellant is not eligible for deduction under Section 80-IB of the IT Act.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the assessee is eligible for the benefit under Section 80-IB of the IT Act?

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The court held that the cases of Commissioner of Income Tax, Madras v. Vinbros and Company, (2015) 14 SCC 483 and Commissioner of Income Tax-I, Mumbai v. Hindustan Petroleum Corporation Limited, (2017) 15 SCC 254* were not applicable to the facts of the present case.
• The court held that when the articles/goods which are manufactured by the assessee, namely, polyurethane foam is an article classifiable in the Eleventh Schedule (entry 25), considering Section 80-IB(2)(iii), the assessee shall not be entitled to the benefit under Section 80-IB of the IT Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the assessee’s manufacturing process concluded with the production of polyurethane foam, an item explicitly listed in the Eleventh Schedule of the Income Tax Act, 1961. The Court emphasized that the assessee did not undertake any further process to convert the foam into car seats. The court noted that the polyurethane foam was merely an ingredient used by other assembly operators to manufacture car seats. The court also noted that the assessee was manufacturing polyurethane foam and supplying the same in different sizes/designs to the assembly operator, which ultimately is being used for car seats. The court held that the assessee is not undertaking any further process for end product, namely, car seats.

Logical Reasoning:

The court rejected the argument that the final product was automobile seats, emphasizing that the assessee’s process ended with the production of polyurethane foam, which is an item listed under the Eleventh Schedule of the Income Tax Act, 1961. The Court noted that the assessee did not undertake any further process to convert the foam into car seats. The Court also rejected the argument that the CEGAT had previously ruled that the appellant’s product could not be classified as polyurethane foam for excise duty purposes, holding it to be irrelevant to the issue at hand. The court concluded that the assessee was not eligible for the tax deduction under Section 80-IB of the IT Act.

The court stated: “The assessee is manufacturing polyurethane foam and supplying the same in different sizes/designs to the assembly operator, which ultimately is being used for car seats. The assessee is not undertaking any further process for end product, namely, car seats.”
The court further stated: “Merely because the assessee is using the chemicals and ultimately what is manufactured is polyurethane foam and the same is used by assembly operators after the process of moulding as car seats, it cannot be said that the end product manufactured by the assessee is car seats/automobile seats.”
The court also stated: “In view of the above when the articles/goods which are manufactured by the assessee, namely, polyurethane foam is an article classifiable in the Eleventh Schedule (entry 25), considering Section 80-IB(2)(iii), the assessee shall not be entitled to the benefit under Section 80-IB of the IT Act.”

Key Takeaways

• Companies manufacturing goods listed in the Eleventh Schedule of the Income Tax Act, 1961 are not eligible for tax deductions under Section 80-IB of the IT Act.
• The final product for the purposes of tax deductions is determined by the manufacturing process undertaken by the assessee.
• If the assessee’s manufacturing process concludes with the production of an item listed in the Eleventh Schedule, they will not be eligible for the deduction, even if that item is used as a component in another product by other manufacturers.
• The court emphasized that the assessee must undertake the process of manufacturing the final product to be eligible for the tax deduction.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The Supreme Court upheld the interpretation that the manufacturing process of the assessee is the determining factor for the benefit of tax deduction. The ratio decidendi of the case is that if the assessee manufactures an item listed in the Eleventh Schedule of the Income Tax Act, 1961, they will not be eligible for the deduction under Section 80-IB of the IT Act, even if that item is used as a component in another product by other manufacturers. There is no change in the previous position of law.

Conclusion

The Supreme Court dismissed the appeal, ruling that M/s Polyflex (India) Pvt. Ltd. was not eligible for tax deductions under Section 80-IB of the Income Tax Act, 1961. The court held that the company’s final product was polyurethane foam, which is listed in the Eleventh Schedule of the IT Act, and not automobile seats. The court emphasized that the company did not undertake any further process to convert the foam into car seats, and therefore, the tax deduction was not applicable.

Category

Parent category: Income Tax Act, 1961
Child categories:

• Section 80-IB, Income Tax Act, 1961
• Eleventh Schedule, Income Tax Act, 1961
• Tax Deduction
• Manufacturing
• Polyurethane Foam

FAQ

Q: What is Section 80-IB of the Income Tax Act, 1961?
A: Section 80-IB of the Income Tax Act, 1961 provides tax deductions to certain industrial undertakings that meet specific criteria. However, this deduction is not available if the company manufactures goods listed in the Eleventh Schedule of the IT Act.

Q: What is the Eleventh Schedule of the Income Tax Act, 1961?
A: The Eleventh Schedule of the Income Tax Act, 1961 lists specific goods and articles, the manufacture of which disqualifies a company from claiming tax deductions under Section 80-IB of the IT Act.

Q: What did the Supreme Court decide in this case?
A: The Supreme Court decided that M/s Polyflex (India) Pvt. Ltd., which manufactures polyurethane foam, is not eligible for tax deductions under Section 80-IB of the IT Act because polyurethane foam is listed in the Eleventh Schedule of the IT Act.

Q: Why did the Supreme Court rule against the company?
A: The Supreme Court ruled against the company because it found that the company’s manufacturing process ended with the production of polyurethane foam, and not automobile seats. The court emphasized that the company did not undertake any further process to convert the foam into car seats, and therefore, the tax deduction was not applicable.

Q: What does this judgment mean for other manufacturers?
A: This judgment means that manufacturers must carefully consider their manufacturing process and the goods they produce to determine their eligibility for tax deductions under Section 80-IB of the IT Act. If the goods manufactured are listed in the Eleventh Schedule of the IT Act, they will not be eligible for the deduction, even if those goods are used as components in other products by other manufacturers.