Income Tax Appellate Tribunal - Kolkata
A. P. Exports, Kolkata vs Department Of Income Tax on 30 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
[Before Hon'ble Shri Mahavir Singh, JM & Hon'ble Shri B.P.Jain, AM ]
I.T.A No.1038/Kol/2008
Assessment Year: 2004-05
D.C.I.T., Circle-28, Vs. M/s. A.P.Exports
Kolkata Kolkata
(Appellant) (Respondent)
(PAN:AAIFA 0404 C)
For the Appellant : Shri Nilay Baran Som, JCIT
For the Respondent : Shri Miraj D.Shah, Advocate
Date of hearing : 23.04.2015.
Date of pronouncement: 30.04.2015.
ORDER
Per Shri B.P.Jain, AM :
This appeal of the Revenue arises out of the order of ld.CIT-Kolkata-XIV, Kolkata dated 14.03.2008 for Assessment Year 2004-05.
2. The Revenue has raised the following grounds of appeal :-
The Ld. CIT(A)-XIV erred in not considering the fact that the assessee firms did not manufacture or produce any article is evidenced from the audit report submitted by the assessee along with the return. In the audit report it was mentioned that the assessee purchased knitting machine and sewing machine at the cost of Rs.48,89,287/- and Rs.22,92,624/-respectively which were not put to use and no depreciation was claimed.
1. That the Ld. CIT(A)-XIV is mistaken in not considering the fact that from Item No.28(a)of the audit report submitted in Form No, 3CD it is found that the assessee purchased 513220 pcs of Garments, out of it 512280 pcs of garments were sold and 940 pcs. remained as closing stock. It is worthy to mention here that the datas in Item 28(a) No of the Form 3CD are given in case of a trading concern.
2. The Ld. CIT(A)-XIV is mistaken in not considering the fact that at item No.28(b) A of the Form No. 3CD (which is applicable in case of manufacturing concern) the description of Raw Material purchased and closing stock is same while the raw material consumed is nil which transpires that the assessee did not manufacture or produce any thing.
3. The Ld. CIT(A)-XIV is mistaken in not considering the fact that in Item No.B of 28(b) of Audit Report (in Form No.3CD)where datas of finished products/key products are furnished has been kept blank evidencing the fact that no article or thing was 2 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 manufactured.
4. The Ld. CIT(A)-XIV is mistaken in Considering the fact that the assessee purchased unfinished goods and afterwards the unfinished goods were converted into finished goods for the reason that data given against Item No. 28(a) of Audit Report evidences that in course of Trading activity the assessee purchased & sold ready-made garments manufactured by others.
5. The Ld. CIT(A)-XIV is mistaken in relying on judicial pronouncements in the case of Addl. CITVs. A. Mukherjee (113 ITR 718, Kolkata) for the reason that in this case the assessee got books printed under the supervision of the assessee on contract basis but here the assessee under appeal did not get the garments manufactured from the sister concern by contract, which is established from the fact that the assessee did not deduct any tax u/s.194C of the I. T. Act, 1961.
6. The Ld. CIT(A)-XIV is mistaken in relying on the case of M/s. Bejbarua Tea Co. Vs. CIT (220 ITR 530) for that the assessee in this case manufactured Tea from tea leaves supplied by the assessee from garden while the assessee under appeal placed purchase order before the sister concern who supplied the finished goods which is established from the manufacturing Alc. submitted by the assessee before the sister concern.
7. The Ld. CIT(A)-XIV is mistaken in considering the fact that the partners of the firm got the garments manufactured in their respective proprietary concern for the reason that the assessee firm placed purchase order to their proprietary concern and purchased the goods which is established from the bills and also from the fact that the assessee firm did not deduct any tax u/s.194C.
8. The Ld. CIT(A)-XIV, is also mistaken in considering the fact that the goods, at least in part,are subjected to certain heat treatment, labeling, hangering and packing for the reason that the expenses shown in the manufacturing do not corroborate those activities as no expenses were debited on account of wages, fuel. electricity. Cost of label purchase claimed only Rs.1,29,402l- and salary claimed Rs.72,500/- which are not enough for labeling more than 4 lakh pieces of garment. Salary is not also commensurate with so many works such as labeling, heat treatment, bar coding, putting on hangers and packing. Labelles purchased are also very small in numbers in comparison to no of garments exported. Hangers were imported and brought into India only on 01.11.2003. Till that date export of Rs.4,11,38,482/- had been made by the assessee before hangers were received. As such it is established that hangering was also not done by the assessee.
9. The Ld. CIT(A)-XIV stated ''those goods, at lease in part, are subjected to certain heat treatment and after labeling put them on hangers, packed and exported". From the above quotation the words "at least In part" corroborate the fact that the Ld. CIT(A) is not also fully convinced that the goods purchased from the sister concerns as a whole were subjected to labeling, heat treatment, bar coding, putting hangers, packing etc. While the Ld. CIT{A)-XIV is not fully satisfied that the whole of the garments were not subjected to labeling, heat treatment, bar coding, putting on hangers and packing he is mistaken in considering the fact that the goods were produced are allowing the exemption u/s.1OB.
10. The Ld. CIT(A)-XIV erred in considering the fact that garments manufactured in the proprietary concern in their individual capacity as proprietor actually manufactured by the firm, as the firm and proprietorship concern have separate entity and treated as 3 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 different"Person" and are taxed as different assessee. Moreover, here the assessee firm placed purchase order beforeproprietorship concern and the proprietorship concern supplied the goods to the assessee ' ------exported them ultimately. The assessee firm did not give any contract to manufacture the .......to the proprietorship concern and in that case the assessee firm should have deduct tax which the assessee firm did not deduct and for this reason it can not be said that the assessee got manufactured the garments from proprietory concern on the behalf of the firm.
11. The Ld. CIT(A)-XIV erred in considering the fact that the assessee firm performed se end activities at least on a portion of goods. But the expenses claimed in the manufacture account filed by the assessee does not corroborate the fact that the assessee firm perform the end activities such as labeting. heat treatment etc.
12. The Ld. CIT{A)-XIV also erred in relying on the case of M/s. Ektara Exports (P) Ltd. in No. 1046 wherein it had held the issue in favour of the assessee holding that even the process of ironing with the aid of power for making a garment marketable amounted to manufacture for the reason that no expense for electricity claimed by the assessee which does not corroborate the fact that the assessee firm has ironed 4 lakh of garments and also no other work was done after purchase of garments & the claims of the assessee that some work has been done after the purchase of garments to make them exportable is not established from the expenses claimed by the assessee in the manufacturing account. "
3. The main question which arises from 12 grounds of appeal raised by the revenue is that the assessee is not a manufacturer and therefore exemption u/s 10B of the Act cannot be allowed.
4. The brief facts of the case are that the assessee claimed exemption of Rs.2,17,79,599/- u/s 10B of the Act which was denied by the AO and the relevant portion observed at pages 2 and 3 are reproduced herein below for the sake of convenience :-
"Though the assessee firm is an approved hundred percent export Oriented Unit, the assessee firm did not manufacture any article or thing to be eligible for claiming deduction u/s.10B. On examination of papers filed alongwith the return and in course of hearing, it is found that the assessee firm has been approved as 100% export oriented unit by the Development Commissioner, Falta Special Economic Zone, for production of 4,00,000 pieces of girls Night Suit two piences Boys Night Suit. T Shirts Pant and Track Suit per year(Annexture-1).Now,on examination of Audit Report submitted by the assessee alongwith the return of income, it is found that the assessee purchased Knitting Machine at the cost of Rs,48,89,287/- and Sewing Machine at Rs.22,92,624/- on which no depreciation was claimed as those machine were not put to use within 31.03.2004. The auditor has also specifically mentioned in the schedule of Fixed Assets that those machines were not put to use within 31.03.2004. The copy of schedule of Fixed Asset as on 31.03.2004 . is enclosed-(Annexure-2) with the order. As such, it is evident that 4 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 the assessee firm did not manufacture an article or thing. 'From Item No.28(9) of the audit report submitted in Form No, 3CD it is found that the assessee purchased 513220 pcs of garments, out of it 512280 pcs of garments were sold and 940 pes. remained as closing stock. It is worthy to mention here that the datas in Item 28~(a) No. Of the Form 3CD are given in case of a trading concern, Datas at Item N028(b) of 3CD form are. furnished in case of a anufacturing concern. At Item No.28(b) A of the Form No. 3CD the description of Raw Material is given where in it is stated that the assessee purchased during the relevant par 684 K s. Of cloth and 3939 kgs of yarn which were neither consumed nor sold and such the whole of the quantities of cloth a yam purchased remained as closing stock which is evident from the Item No.A of 28(b). A\s no raw material is stated at A of Item No.28(b) of the Audit Report (Form No. 3CD) to be consumed, it is evident that the assessee firm did not manufacture or produce any article or things. From the Item No. B of 28(b) of Audit Report (in Form No.3CD) where datas of Finished Products/ by products are furnished has been kept blank which means that the assessee firm did not manufacture any Article or things, As the assessee claimed deduction u/s.10B. in course of hearing, the assessee was asked to file the Manufacturing Alc. Along with the short description of manufacturing procedure and the same were filed. The Manufacturing A/c. is annexed (Annexure-3) with the order.
On examination of the above Alc. it is found that cost of raw materials i.e., cost of 683.92 kgs. Of cloth amounting to Rs.2,22,592/- and cost of 3939 Kgs. Of yarn were not debited. As the raw materials were not used, there was no manufacturing activities.
Vide letter dated 2"1.09-.2006 (Annexure-a) the assessee' stated that cost of manufacturing consists of purchase, freight inward, insurance, packing charges, printing and Jabelinq, printing & stationery and salary. Here purchase does not include purchase of raw material but ready made garments produced by others.
The short description of manufacturing process is re-produced below :
"AP.Exports purchased Semi-finished Garments from local markets. Then it perform various manufacturing function according to para 9.30 of EXIM Policy 2002-07(copy enclosed) iike Finishing, Labelling, hanger & PIP Bags packing of each finished and manufactured piece of garment. Then according to buyer/customers requirements these manufactured garments are packed in specified quantity eg; Doz/pieces in cartons and finally exported earning valuable Foreign Exchange for the Country."
In order to establish that manufacturing process was done, the assessee firm stated that it has purchased semi-finished garments which have been turned into finished garments. But this argument of the assessee is not acceptable as in the Item No.A of 28(b) where the quantity of raw-material stated, there is no purchase of semi-finished goods. In the details of purchase the assessee did not file any purchase of semi finished garments; From Item No.28(a) of audit report it IS crystal clear that in course of trading activity the assessee purchased & sold ready-made . garments manufactured by others. '/ The assessee also tned to establish that they have labelled & packed the garments and that labelling and packing are also manufacturing activities as per Para 9.30 of EXIM policy 2002-07. But from the details of expenditure filed with the manufacturing account, it is found that iabelling of the garments was done from "Excel India" and emblem Graphics". The assessee firm itself did not label the garments, instead, it has been got done from other.
5 ITA No.1038/Kol/2008M/s. A.P.Exports.
A.Yr.2004-05 The Development Commissioner. Falta Special Economic Zone approved the unit of the assessee firm under 100% EOU Scheme for manufacture & Export of Girls Night Suit two pes., Boys Night,;suit, T Suits Pant, Track Suit. The assessee firm did not manufacture these item which is evident from the Item No. A of 28(b) from where it is found that the assessee did not utilise raw material and also from the Schedule of Fixed Asset it is found that the assessee did not utilise the machineries for production. Therefore. it is a fact that the assessee did not manufacture or produce any Article or things. The assessee was given approval by the Development Commissioner not for labelling of garments but for manufacturing of garments. As such the assessee did not manufacture garments as per approval of Development Commissioner, Falta Special Economic Zone.
On the basis of the above discussion, the exemption of Rs.2.17.79.599/- claimed ·u/s.10B is disalIowed as no manufacturinq was done in compliance to Section 10B.
4.1. Before the ld. CIT(A) the assessee made the submissions which was sent to the AO for report. The report was obtained by the ld. CIT(A) and after considering the report of the AO and submissions of the assessee before the ld. CIT(A) observed that the assessee has fulfilled all the conditions stipulated u/s 10B of the Act vide pages 9, 10 and 11 of his order.
5. The ld. DR relied upon the order of AO and the remand report of the AO where as the Authorised Representative relied upon the submissions made before the ld. CIT(A) and AO and the reply to the remand report by the AO and have relied upon the decisions of various courts of law and the definition of "manufacture" as mentioned in the order of ld. CIT(A).
6. We have heard the rival contentions and perused the facts of the case. The undisputed facts in the case of the assessee are that the assessee is an approved hundred per cent export oriented unit approved by the Development Commissioner, Falta Special Economic Zone. The assessee firm has filed its return of income at nil claiming deduction u/s 10B and 80HHC of the Act. It was claimed by the assessee that the assessee is buying semi finished hosiery garments from two suppliers M/s. Anil Industries and M/s. Arora Industries. Such semi-finished garments being produced by the said suppliers were manufactured under supervision of assessee firm. On receipt of the semi-finished garments, the assessee firm has fixed on stitches 6 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 various stickers including heat/pressure stickers which are posted to improve the look and design of the garments. The semi-finished garments are then ironed and packed in poly poplin bags along with hanger putting them in export worthy saleable conditions. Silica gel is used to safeguard these garments from moth or odour. The said garments are then bar coded and tagged in the final stage. The garments are then packed in cartons. Thereafter the garments were exported by the assessee firm. But all such processes are not necessarily made on every garments being exported. Most of such process is made on the said garments being exported. The expenses incurred on account of above mentioned processes were duly reflected in the books of account and have been verified by the AO. It was argued that to constitute manufacture, it is not necessary that one should absolutely make out a new thing because it is well settled that one cannot make a thing or create a matter by hand but it is transformation of matter into something else is a question of degree. The ld. Counsel for the assessee gave many definitions of manufacture and some of them are reproduced hereunder :-
"Manufacture" would be to work up materials into forms for use, making of articles or materials by physical labour or mechanical power and making of goods by hand or by machinery often in large scale by division of labour.
"Manufacture" in relation to drug or cosmetic includes any process or part of a process for making, altering, ornaments, finishing and packing, labeling. Breaking up as otherwise treating or adopting any drug with a view to it sale and distribution Drugs and Cosmetics Act 1940 (Sec.3(f).
"Manufacture" Means any process for making altering, repairing ornamenting finishing oiling, washing, cleaning breaking up demolishing or otherwise treating or adopting any article or substance cue with a view to use, salt, transport delivery or disposal Employees Provident Funds Act, 1952, Sec.2(10)."
6.1. It was also stated that the term "Manufacture" has been defined in clause 9.32 of Rules and Regulations relating to EOU framed by Government of India as under :-
"Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labeling, re- conditioning, repair, remarking, refurbishing, testing, calibration, re-engineering. Manufacture, for the purpose of this policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining."
6.2. The ld. Counsel also brought to our notice the definitions of manufacture u/s 2(f) of the Act of Central Excise Act, 19044 and also notification of Central Excise in this respect. It was also argued that the expression "manufacture" has been defined in 7 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 the Central Excise Act which is a charging Act for imposing duty on goods manufactured and that of the legislature as defined the expression "manufacture".
6.3. The ld. Counsel relied upon the decision of various courts of law. The decisions relied upon by the ld. Counsel of the assesse are reproduced as under for the sake of convenience :-
" 1. Additional CIT Vs. West Bengal III, Kolkata, A. Mukherjee & Co. rvt. Ltd. - 113 ITR 718 where a publisher of books - not owning a printing press of its own got the book printed as per requirement under its supervision, got book bound after suitable changes and then put the publication for sale. These activities did amount to manufacture or production of goods.
2. Bejbarua Tea Co. Pvt. Ltd. Vs. CIT reported in 220 ITR 530 - In this case the assessee did not have a tea manufacturing factory of its own, tea was manufactured in a sister concern under its supervision and after the tea was (made, the assessee company got the tea bag for further sale. It was held that the assessee manufactured tea.
-.3. CIT, Gujarat Vs. Ajay Printer - 58 ITR 811, Printing of Balance Sheets, Profit & Loss Accounts, Dividend Warrants, Pamphlets, Share Certificates etc. is a business which consists wholly manufacture of goods.
4. 119 ITR 145, Kolkata High Court - a manufacturer may hire plain machinery and employed hired labour and manufacture has goods. The assessee doing so is an industrial company.
5. 235 ITR 5 - In the absence of definition of industrial undertaking in the Income Tax Act, 1961, it was held that where the assessee purchased cashew nuts and entrusted them with another company for processing obtained the processed cashew kernels packed and exported the same, the assessee was entitled to deduction u/s80HH and 80J of the Income Tax Act, 1961 in respect of profit derived from such activity of processing raw cashew and exporting the same.
6. Allahabad High Court, CrT Vs. Talwar Khullar Pvt. LtC!. the assessee company got manufactured various articles of brass wire from Artisan under Iits supervision and control I he assessee gave the pattern and design of the articles to be manufactured by the Artisan who purchased the raw materials, manufactured the articles according to the different models supplied by the assessee. The articles in raw form were examined by the assessee and directions were given to the Artisan to modify and polish the same. The assessee sold finished products and claimed that it owned an industrial undertaking in respect of manufacturing of fresh articles. The Allahabad High Court accepts the assessee's claim"
6.4. As regards the allegation of the AO the assessee has submitted the explanation with regard to the observations of the AO that the assessee did not manufacture any article or any thing because the assessee had neither used the machines during the relevant financial year nor consumed the raw material. It was explained that the assessee firm was buying semi-finished garments and then various manufacturing 8 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 function according para 930- Exim Policies 2006-07 like finishing, labelling hanger P/P bags, packing, ,ironing etc were made. It is also an undisputed fact that the assessee garment unit was approved by the Development Commissioner, Falta Special Zone and if the assesee did not manufacture any garments, the Development Commissioner could withdraw the approval which has not been done. Our attention was drawn to the decision in the case of Shilpi Advertising Ltd. Reported in 263 ITR 479 and CBDT Circular No.495 dt.22.09.87 and 694 dtd. 23.11.1999 wherein it has been held and mentioned that where a unit was in a free trade zone and was engaged in assembling or processing of goods for export and was earning foreign exchange, it would qualify for deduction u/s 10A of the Act. On the same analogy the present unit is also an approved EOU.
6.5. As regards knitting machine it has not been used by the assessee. It was explained that the assessee was buying semi finished garments thereafter it was carrying various process. There was no use of knitting machine for the relevant financial year and non-use of machine cannot be a reason for not allowing rebate or exemption u/s 10B of the Act. As regards the defect in Form No.3CD and col.28(a)
(b) of Form 3CD it was stated that " inadvertent typographical mistake which the assessee has filed a revised Audit Report in Form No.3CD from the auditor. AO has not taken any cognisance of the same while preparing the Remand Report. As regards the opening and closing stock and no consumption had been done during the year. It was explained that no raw material was purchased . Since no raw material was required for various process carried out by the assessee firm as mentioned herein above.
6.6. As regards the remand report of the AO it was mentioned that during the survey made on M/s. Arora Industries and M/s. Anil Industries certain invoices were raised on the assessee were impounded. The word semi-finished goods were not mentioned. It was explained in this regard that the word " unpacked and unlable condition" is mentioned and packing and labelling were also made by the assessee. This description means that the said garments were semi-finished. Therefore there is no discrepancy in the said invoices. No garment can be sold in the export market 9 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 without making proper label, tags, iron and packing etc as has been done by the assessee in the present case. It was also explained that supplier was not able to manufacture finished garments . They had to manufacture semi finished garment and export the semi finished garments was not possible. The assessee had received huge export order and therefore the assessee had to make export of the garments. The suppliers could not export since they did not have any export order and therefore no question of claiming duty draw back by the suppliers and therefore they had to issue disclaimer certificates to the assessee. Therefore the suppliers did not supply any ready made garments. It was also clarified that the assessee is not doing all the processes on each and every piece of garment. For e.g. bar code labels were affixed on some of the garments, emblem graphics, stickers were affixed on some of the garments. Accordingly heat treated emblem was given on some of the garments, ironing was made, packing of garments was also made on different garments. In view of the processes carried out by the assessee as mentioned herein above may be all the processes of the semi finished garments will tantamount and will be treated as a manufacture.
6.7. As regards the notices remained unserved on the suppliers, it was stated that non service on the supplier was not known to the assesee and therefore such non service of notice cannot make the assessee to loose exemption u/s 10B of the Act. In the circumstances and facts of the case we hold that the assessee is a manufacturer and entitled to exemption u/s 10B of the Act. Reliance is also placed on the decision of ITAT in the case of M/s. Ektara Exports (P) Ltd in ITA NO.1046/Kol/2005 dated 29th July, 2005 and the decision of Hon'ble High Court where such decision has been confirmed in ITA NO.657 of 2008 dated 10th September, 2008 on similar issue u/s 10A of the Act. Reliance is also placed in ITAT Kolkata Bench in the case of DCIT vs Jaytee Exports in ITA NO.35&36/Kol/2011 dated 3rd May, 2012 which decision has been confirmed by the Hon'ble Calcutta High Court in ITA No.184 of 2013 dated 6th March, 2014 where it has been held that stitching of buttons is an activity which is a manufacturing activity and order of ITAT was confirmed by the Hon'ble Calcutta High Court. In the circumstances and facts of the case we find no infirmity in the 10 ITA No.1038/Kol/2008 M/s. A.P.Exports.
A.Yr.2004-05 order of the ld. CIT(A), who has rightly allowed the claim of the assessee for exemption u/s 10B of the Act. Accordingly all the grounds of revenue's appeal are dismissed.
7. In the result the appeal of the Revenue is dismissed.
/' ~ Order pronounced in the court on 30.04.2015.
Sd/- Sd/-
[ Mahavir Singh ] [B.P.Jain]
Judicial Member Accountant Member
Date: 30.04.2015.
R.G.(.P.S.)
Copy of the order forwarded to:
1. M/s. A.P.Exports, 33, Tollygunje Circular Road, Kolkata-53.
2 D.C.I.T.- Circle-28, Kolkata.
3. CIT(A)-XIV, Kolkata 4. CIT Kolkata.
CIT(DR), Kolkata Benches, Kolkata.
True Copy, By order, Asst. Registrar, ITAT, Kolkata Benches