Badar Durrez Ahmed and R V Easwar JJ For the Appellant Mr S Ganesh Sr Adv Mr Ajay Bhargava Mrs Vanita Bhargava and Ms Gauri Rishi Advs For the Respondents Mr Jatan Singh CGSC Mr Tushar Singh and Mr Soayib Qureshi Advs JUDGEMENT 1 This writ petition seeks the quashing of the orders dated 10 10 1979 21 01 1980 and 18 05 1985 whereby the respondent Nos 1 and 2 have refused to issue certificates to the petitioner under section 32A 2B ii of the Income Tax Act 1961 in respect of the relevant assessment years 2 The petitioner has also prayed for the issuance of a writ of mandamus directing the respondent Nos 1 and 2 to grant the certificates in terms of the provisions of section 32A 2B ii of the said Act to the effect that the petitioner has manufactured or produced caustic soda liquid chlorine and hydro chloric acid by using the technology including the process and other know how developed by Central Electrochemical Research Institute CECRI which is a unit of National Research and Development Corporation of India NRDC It is the case of the petitioner that CECRI is a specified laboratory and therefore the certificate ought to have been issued for the assessment years 1979 80 to 1983 84 A writ of mandamus is sought in this regard The petitioner has also prayed for issuance of a writ of mandamus directing the respondent No 3 to admit and take on record the said certificates for assessment years 1979 80 to 1983 84 and to grant investment allowance at the higher rate of 35 as claimed by the petitioner as against the rate of 25 already granted by the income tax department to the petitioner 3 The facts are that the petitioner manufactures inter alia caustic soda at its plant at Nagda Madhya Pradesh Most of the caustic soda produced by the petitioner is captively used for production of viscose staple fibre Rayon Earlier the petitioner was using graphite anodes in its process of electrolysis for production of caustic soda However the use of graphite plates as anodes had several disadvantages which had been pointed out by the petitioner at the time of filing the application for the grant of the said certificates The disadvantages were as under ldquo 1 The graphite plates get eroded and have to be replaced after a fixed interval say about 10 ndash 12 months 2 The voltage drop across the cell using graphite plates is high as the chlorine gas produced in the cell does not escape through the graphite anode fast enough and bubbles of chlorine gas get deposited on graphite surface which offer resistance to the flow of current from anode to cathode This phenomenon is called ldquo Bubble effect rdquo 3 The Graphite particles which fall due to erosion of graphite plates get mixed with brine and mercury and cause process trouble 4 The cell gas is contaminated by gases like carbon dioxide and carbon monoxide and increased level of hydrogen gas 5 The voltage drop across the cell goes on increasing as the graphite anodes get older and older which further increases the power consumption rdquo 4 It was also indicated in Annexure G to the application filed for the grant of certificate that as a result of prolonged research and experimentation CECRI at Karaikudi Tamil Nadu attached to NRDC developed and evolved the technology for the manufacture of caustic soda by employing Titanium Substrate Insoluble Anodes TSIA The use of TSIA in the production of caustic soda actually reduced the disadvantages which existed when graphite anodes were used 5 TSIA consists of fingers that is circular rods of a small diameter welded in a frame like configuration and bound by a super structure of longitudinal and cross ribs The material of construction is titanium The anode surface facing the electrolyte is coated with a superthin coating of rare earth metal oxides This coating participates actively in the electrolysis Unlike graphite anodes the metal anodes do not lose their shape or dimensions hence they are referred to as ldquo permanent type rdquo anodes After a reasonably long service life of 20 to 24 months the coating wears off and at this stage the anodes are sent in for re coating Due to its unique characteristic of maintaining constant dimensions it had become possible to obtain a reduced and most optimum gap between the anode and cathode Graphite anodes in worn out condition offered a very rough and uneven surface for electrolysis and due to this the gap between the graphite anode and flowing film of mercury cathode could not be reduced in practice to less than 5 to 6 mm In case the gap was reduced beyond this level there was every possibility of the anodes touching the cell bottom containing the flowing film of mercury at certain places thereby resulting in a short circuit which would damage the anodes disturb the mercury flow and stop the electrolysis Metal anodes having smooth surface have a great advantage over graphite anodes in this respect With proper anode adjustment devices it has been possible to continuously maintain a gap of 2 to 3 mm between the two electrodes without risking a short circuit Reduced electrode gap sometimes called as brine gap results in lower voltage and a lower power consumption With the Titanium Substrate Insoluble Anodes TSIA the other disadvantages of graphite anodes stated herein above are also eliminated Loss of graphite is eliminated Chlorine gas remains free of Carbon Dioxide and Carbon Monoxide Apart from a reduced brine gap the bubble effect is negligible This results in a reduction in cell voltage which entails a further reduction in power consumption which is a major raw material in the manufacture of Caustic Soda It was also pointed out by the petitioner that alongwith the new technology and process which had been developed by CECRI with the use of TSIA the petitioner had installed an electrolyser suitable for the purpose which operated on the new technology and which had entirely new features appliances and instruments The new electrolyser installed by it was totally different from the old electrolyser The petitioner pointed out as under ldquo The most important part of the electrolyser system viz anodes are supported by the top frames and the frames in turn are supported by jacks The top frames are supported by special type of jacks manufactured for the purpose The main top supporting anode frames is also specially designed and manufactured implementing the major changes to incorporate motorized drive mechanism The top rubber cover serving as a lining to the top cover is also re designed to suit the operation of the Titanium Substrate Insoluble Anodes Configuration of the electrolyser system is completely re designed with new devices machineries appliances and instruments necessary for adopting the new technology and process and for effecting all possible improvement in the operation and functioning of the electrolyser system Presently graphite anodes are adjusted manually by raising and lowering of the jacks which support the frames holding these anodes However with the installation of Titanium Substrate Insoluble Anodes a motorized anode adjustment system is required to be provided along with these anodes so as to obtain very uniform and precision anode adjustment If this is not done one main purpose of obtaining a minimum electrode gap would be defeated When one talks about an electrode gap of 2 to 3 mm the anode adjustment has to be very much mechanized and uniform rdquo 6 We may also point out that in the application made by the petitioner for each of the years the petitioner had in response to the query at serial No 7 of the form with regard to filing the details of engineering assistance services rendered by the laboratory to utilize the know how had given the following answer ldquo The Scientists of Central Electro Chemical Research Institute who have developed the new technology and process of manufacturing Caustic Soda and Engineers of Titanium Equipment and Anode Manufacturing Co Ltd which has been licensed to use the technology and know how for manufacturing Titanium Substrate Insoluble Anodes visited our factory and provided us the necessary technique and guidance for designing and installing the electrolyser suitable for the new technology and process and assisted us in commissioning the same They also advised us regarding adoption of suitable process conditions They still continue to advise and guide us whenever we approach them rdquo 7 However the said applications of the petitioner were rejected The first rejection came by virtue of the impugned order dated 10 10 1979 which is to the following effect ldquo I am directed to refer to your letter No GRCN 79 2795 dated 10th July 1979 and discussions which Dr R Vaidyanathan your representative had in this Department on 20th Aug 1979 regarding the issue of certificate u s 32 A 2B of the Income tax Act and to say that your application has been carefully examined in this Department The clarification sent by you vide your letter No GR ND 79 dated the 31st Aug 1979 have also been examined It is seen that M s Titanium Equipment and Anode Manufacturing Co Ltd Madras is commercializing CECRI s technology and producing anodes which have been installed by your company for the manufacture of Caustic Soda Liquid Chlorine Hydrochloric Acid Such anodes are being installed at various caustic soda plants The use of anodes for manufacture of caustic soda which is utilisation of the product based on indigenous technology is not covered u s 32 A 2B of the Income tax Act for the issue of a certificate rdquo 8 The second order of rejection is dated 21 01 1980 which is as under ldquo I am directed refer to your letter No GRCN ACCTS 6161 dated the 30th Nov 1979 regarding issue of certificate u s 32 A 2B of the Income tax Act The matter has been re examined in this Department but it is regretted for the reasons already mentioned in our letter of even number dated 10th Oct 1979 it is not possible for this Department to issue a certificate in question rdquo 9 And finally the third order which is impugned before us is one dated 18 05 1985 which reads as under ldquo I am directed to refer to your letter No GR DO 85 dated 6th April 1985 regarding the issue of a certificate under section 32A 2B of Income Tax Act It is noted that M s Titanium Equipment and Anode Manufacturing Co Ltd Madras is commercialising CECRI s technology of producing Titanium Substrate Insoluble Anodes TSIA It is also noted that you have installed plant and machinery for the manufacturing of caustic soda and not for TSIA In the light of above it is regretted that it has not been found possible to issue a certificate under section 32A 2B of the Income Tax Act as communicated to you earlier vide our letter No 9 21 79 RA dated 10th October 1979 rdquo 10 On going through the said orders it is apparent that the reason for rejection was that while M s Titanium Equipment and Anode Manufacturing Company Ltd Madras TEAM was utilizing the technology to manufacture TSIA the petitioner was only using the said TSIA for manufacture of caustic soda and therefore such use was not covered under section 32A 2B of the Income tax Act 1961 and therefore a certificate under that provision could not be issued The same stand has been taken by Mr Jatan Singh the learned counsel appearing on behalf of the respondent Nos 1 2 and 5 He has contended that the technology that was developed by CECRI was for the manufacture of TSIA That technology has already been utilised by TEAM for manufacture of TSIA Furthermore while TEAM would be entitled for a certificate under section 32A 2B of the Income Tax Act 1961 in the utilisation of the technology to manufacture of TSIA the petitioner would not be entitled to the issuance of a certificate as it only uses the TSIA for the manufacture of caustic soda It was also pointed out by Mr Jatan Singh that such a certificate had been issued to TEAM and they have availed of it However Mr Ganesh the learned senior counsel appearing on behalf of the petitioner contended that this approach is erroneous because of improper understanding of the technology which was developed by CECRI CECRI had developed not only the technology to manufacture the TSIA but also the know how or the process for use of TSIA in the manufacture of caustic soda through electrolysis He submitted that the technology was a composite technology both for the manufacture of TSIA and for the utilisation of TSIA in the process of manufacture of caustic soda Furthermore he pointed out that the license which was granted by NRDC to TEAM was for the manufacture of TSIA for the use in the manufacture of caustic soda In other words TSIA manufactured by TEAM could not be sold to any manufacturer other than a manufacturer of caustic soda Mr Ganesh had also drawn our attention to the paragraph 17 of the petition which reads as under ldquo 17 The petitioner says that TEAM simultaneously permits the right to use the said new technology developed by CECRI and sells the metal anodes to enable the practical application of the said technology as part of the same transaction It charges royalty for the former and price for the latter TEAM does not separately sell the metal anodes It only sells the metal anodes only to one who has agreed to pay royalty for the use of the new technology evolved by CECRI The right to use the said new technology and the sale of metal anodes are combined into one transaction The petitioner further says that the said royalty of Rs 12 per tonne is paid by it for using the new and improved technology and process developed by CECRI The said royalty is charged and collected by NRDS through the medium of TEAM for the purpose of their own convenience Thus TEAM collects royalty from the petitioner and pays it to NRDC It is the petitioner who is charged the royalty for the right to use the new technology and process for the manufacture of caustic soda It needs to be appreciated that the new technology based on the use of metal anodes developed by CECRI was for the chlor alkali industry and it is for this reason that NRDC has been recovering royalty calculated on the production of caustic soda rdquo 11 On going through the above extract it is apparent that the petitioner has set up the case that TEAM simultaneously licenced the right to use the said new technology developed by CECRI and also sold TSIA to enable the practical utilization thereof as a part of the same transaction While it charged royalty for the former it charged a price for the latter It is not in dispute that part of the royalty which is recovered by TEAM from the petitioner is passed on to NRDC which again bifurcates the same one part for itself and the other part for CECRI Mr Ganesh stated that these averments made in the petition have not been specifically denied by the respondents in their counter affidavit The reply given by the respondent Nos 1 2 and 5 to the said paragraph 17 of the writ petition is as under ldquo I say that C E C R I had developed the technology for metal anodes TSIA The petitioner manufactures caustic soda and not the TSIA The payment of royalty by the petitioner is by virtue of the agreement NRDC has made with the TEAM for the manufacture of anodes rdquo On going through the above extract we agree with the submission made by Mr Ganesh that the submissions of the petitioner have not been specifically denied In other words it will have to be accepted that what TEAM................Income Tax - Case Law
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