Income Tax Appellate Tribunal - Panji
Lift Controls Pvt. Ltd., Panaji vs Department Of Income Tax on 4 September, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PANAJI BENCH, PANAJI
BEFORE SHRI P.K. BANSAL, HON'BLE ACCOUNTANT MEMBER
AND SHRI D.T. GARASIA, HON'BLE JUDICIAL MEMBER
:
ITA NOS. 147 TO 152/PNJ/2014 ASST. YEAR : 2004-05 TO 2009-10
Asst. Commissioner of Income Vs M/s. Lift Control (P) Ltd.,
Tax, Circle-2(1), Panaji, Goa. No. 4, Ponda Commerce Centre,
(Appellant) Ponda, Goa 403 401.
PAN : AAACL6371Q (Respondent)
Assessee by : Vardhama Jain, Adv. &
Sandip Bhandare, CA
Revenue by : Banjul Barthakur, Ld. DR
Date of Hearing : 07/08/2014
Date of Pronouncement : 04/09/2014
ORDER
PER P.K. BANSAL
1. All these appeals have been filed by the Revenue against the common order of CIT(A) dt. 23-01-2014 by taking the following common effective grounds of appeal :
―1. The Ld CIT(A) has erred in allowing the assessee's appeal by allowing the claim of deduction claimed u/s 80IB for unit-II without considering the merit of the case.
2. The Ld CIT(A), has erred in saying that unit-II is an independent manufacturing unit eligible for deduction u/s 80IB of the I.T. Act and allowed the deduction u/s 80IB(4) on profit of said unit.‖
2. The brief facts of this case are relating to the grounds of appeal taken by the Revenue are that during the Assessment Year 2008-09, the Assessing Officer while examining the claim of the assessee u/s 80IB(4) for Unit-I for Lift Control Penal eligible for 30% deduction as it was 7th Assessment Year and 2 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) Unit-II for Wire Harness eligible for 100 % deduction as being 5th Assessment Year. It was noted that the Assessee is basically into the production of Lift Control Boxes in Unit-I and Wire Harness in Unit-II is engaged not in manufacturing or production of any article or thing but was engaged merely in processing. The Assessing Officer was also of the opinion that the Unit-II was not a separate unit for commercial production and therefore, on the basis that it was not having separate electrical connection, it was having common building, there were common employees, sale bill was common, took the view that Unit- II was also not an independent and separate Unit. Therefore, he disallowed the deduction claimed by the assessee u/s 80IB in respect of Unit-II. When the matter was pending before the CIT(A), the Assessing Officer re-opened the assessment for the Assessment Year 2004-05 to 2007-08. During the Assessment Year 2009-10 also the deduction claimed by the assessee u/s 80IB in respect of Unit-II was disallowed on the basis of finding given in Assessment Year 2008-09. When the matter went before the CIT(A), CIT(A) by his common order after noting that the similar claim of the Assessee was accepted by the Assessing Officer in the Assessment Year 2005-06 which was completed u/s 143(3) read with Section 263 dated 4.5.2010. He allowed the claim to the Assessee by observing as under:-
― After taking into account, facts of the case, contents of the assessment order for AY 2005-06 and, written submissions filed by the assessee with relevant case laws and the claim of the assessee u/s 80IB for Unit-II is allowed.‖ The Assessee went in appeal before CIT(A) against the order of the AO for A.Y 2008-09 dt. 28.12.2010 taking the first ground that the AO has erred on facts and in law in making the disallowance of Rs.2,39,45,504/- of the claim of Unit- II u/s 80IB of the Income Tax Act. CIT(A) after hearing the submission of the Assessee vide its order dt. 30.11.2011 took the view that the claim of the Assessee u/s 80IB in respect of Unit-II was found to be correct by observing as under :
3 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) ―The case was discussed. The claim of assessee that the Unit-II of wire harness is eligible for 80IB deduction is examined in the light of the fact that Unit-II is having 7.25 KVA load and the manufacturing activity of the Unit-II is eligible for 80IB deduction as per the provisions of the section 80IB. The said claim is found to be correct.
After taking into account, facts of the case, contents of the assessment order for AY 2005-06 and, written submissions filed by the assessee with relevant case laws the claim of the assessee u/s 80IB for Unit-II is allowed.‖ Against the said order, the Revenue went in appeal before the Tribunal. The Assessee went in appeal against the re-assessment which was re-opened u/s 147 relating to A.Y 2003-04 to 2007-08. CIT(A) disposed off all the appeals by one common order dt. 18.4.2013 relating to A.Y 2004-05 to 2009-10. When the matter went before the Tribunal, the Tribunal vide its consolidated order dt. 25.10.2013 set aside the order of the CIT(A) dt. 18.4.2013 for the A.Y 2004-05 to 2009-10 and directed the CIT(A) to re-decide the issue afresh in accordance with the law by holding as under :
―5. We have heard the rival submission and carefully considered the same. We noted from the submission made by the Learned DR and not disputed by the Learned AR that the assessment order for the Assessment Year 2005-06 which was passed u/s 143(3) r.w. Section 263 dated 4.5.2010 was re-opened u/s 147 and the claim allowed to the assessee u/s 80IB in respect Unit-II during the Assessment Year 2005-06 vide order dated 4.5.2010 was disallowed by the Assessing Officer vide his order passed u/s 143(3) r.w. 147 dated 2.12.2011 which was also under appeal before us. The CIT(A) while deciding the issue whether the assessee is eligible for deduction u/s 80IB in respect of Unit-II got influenced by the assessment order for the Assessment Year 2005-06 dated 4.5.2010 which no more remains in existence once the assessment for the Assessment Year 2005-06 got re-opened. We also noted that the Assessing Officer has disallowed the claim of the assessee u/s 80IB in respect of Unit-II on the pretext that the Unit-II is not engaged in production or manufacturing of article or a thing and secondly the Unit-II is not an independent Unit. In our opinion, the CIT(A) should have given his findings on merit whether the assessee is engaged in the manufacturing or production of article or thing or whether the Unit- II is eligible as an independent unit u/s 80IB or not. The CIT(A) while allowing the claim of the assessee, we noted that, merely got influenced by the assessment order for the assessment year 2005-06 dated 4.5.2010 which, in our opinion, no more remains in existence once assessment for the Assessment Year 2005-06 got re-
4 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) opened by the Assessing Officer and Assessing Officer has disallowed the claim of the assessee even during the Assessment Year 2005-06 vide its order dated 2.12.2011 passed u/s 143(3) r.w. Section 147 of the Income Tax Act. We noted that the CIT(A) has passed the order on 18.4.2013 by which date the order dated 4.5.2010 no more remains in existence so the rule of consistency could not be applied in the case of the assessee. The decision of Radhasoami Satsang Vs. CIT 193 ITR 321(SC), Dr. Of I.Tax (E) Vs. Apparel Export Promotion Council 244 ITR 734(Del.), CIT Vs. Neo Poly Pack (P) Ltd. 245 ITR 492 (Del.) were not applicable.
5.1 In view of this, we set aside the common order of the CIT(A) dated 18.04.2013 for the Assessment Year 2004-05 to 2009-10 and restore this issue to the file of the CIT(A) with the direction that the CIT(A) should give a clear cut finding on merit after discussing the points on which the Assessing Officer has disallowed the claim of the assessee. While deciding the issue on merit we may mention that the CIT(A) should give proper opportunity to the assessee as well as to the Revenue. The CIT(A) is also directed not to get influenced with the assessment order for the Assessment Year 2005-06 passed by the Assessing Officer u/s 143(3) r.w. Section 263 dated 4.5.2010 accepting the claim of the deduction u/s 80IB for Unit-II. This order, in our opinion, no more remains in existence as this assessment order has been re-opened by the Revenue u/s 147 and revenue has disallowed deduction U/s 80IB to assessee in this year also.‖ CIT(A) subsequently re-decided all the appeals vide its order dt. 23.1.2014 i.e. impugned order before us. CIT(A) ultimately took the view that Unit-I and Unit-II are distinct and separate units and Unit-II is engaged in manufacturing activity and in consequence directed the AO to allow the claim of deduction u/s 80IB by observing as under :
―During the course of appellate proceedings, Shri Mahendra Khandeparkar, Director of the appellant company had also appeared and I tried to understand the difference between two products, i.e. Control Panels and wire-harnesses. What I understood is that Control Panels are more of electronic item. It receives and relays order electronically, so that the Lift moves from one floor to another at the wish of the operator. On the other hand wire-harness is used to take the Electrical commands of the entire lift. It's a important part of the Lift. For anyone installing a lift system, it is possible that Control Panels are purchased from one company and wire-harness is purchased from another. These two products have not only different nomenclature, but also different manufacturing technology and different usage.
5 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) Thus, what I have understood from the assessment order and the submission of the appellant and personal discussion with the Director of the appellant company is that, through there is unity of management and control, and the plots are adjacent to each other, having common electricity connection and common administrative and marketing & sales staff. Still unit-II can not be said to be just expansion or extension of unit-I. Unit-I was created to manufacture Control-Panels, whereas unit-II was created to produce wire-harnesses. These two products require different technology, different machines and different set of skilled manpower. Had unit-II also manufactured the same item as that of unit-I, it would have been extension of the existing manufacturing facility. Thus, on the basis of the above discussed facts, in my opinion, unit-I and unit-II are separate units, manufacturing different products, and are capable of functioning independent of each other, as there is different technology and different machines are used.
5. As per the direction of Hon'ble ITAT, Panaji, the second issue to be decided is whether the process of making wire harness can qualify as manufacture to be eligible for claim of deduction u/s 80IB.
The A.O held that the process can only be called assembling and not manufacturing. I have tried to understand the process and usage of wire-harness. Wire harness is not an ordinary product, which anyone can make. This harness which is used in lifts and elevator installations are highly specialised and have and are manufactured as per the requirement of the lift. Any malfunction or faulty connection shall result in an accident and place human lives at danger. Therefore, there is strict quality check, before they can be sent for being used in lifts. The major steps involved are wire cutting and stripping, wire bundling and taping, crimping and hardware connection section and ultimately testing. Lift has to start from stationery position and then stop from a moving situation. Most of the lifts are installed vertically and when its coming down, it gathers a momentum. Any malfunction shall result in a tragedy and therefore, one has to understand that the wire-harness is different and a highly specialised product and goes through complicated technical processes and strict quality testing. In view of the above, I have not even an iota of a doubt that this process is a process of manufacturing and nothing else. Since unit-II is engaged in the manufacturing of wire-harnesses, it is eligible for claim of deduction u/s 80IB.‖
3. The ld. DR before us relied on the order of the AO while the ld. AR reiterated the submissions made before the CIT(A). The Ld. AR contended that both the units are manufacturing different products. Unit-I is manufacturing control panels which is more of electrical and electronic equipment used in the installation and working of lift and elevators. Unit-II in respect of which the 6 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) Assessee claimed deduction u/s 80IB @ 100% was started in the financial year 2003-04. Adjacent land to Unit-I was purchased for establishing Unit-II. Unit- II is engaged in manufacturing of wire harness which is completely different product than the control panels. The workers and employees working in Unit-I & Unit-II are different. There are separate and different excise codes for both the products. The Unit-I was started in F.Y 2001-02. Provident Fund, ESI are paid for workers and employees engaged in manufacturing at Unit-I and Unit-II separately. Common bills are never issued for two different products. For this attention was drawn towards the bills. Both products are sold independently even though wire harness can also be used for lifts. The manufacturing process of both units is different. In respect of wire harness, Unit-II, it was contended that it consists of four processes; first process consists of wire cutting and stripping, second process consists of wire bundling and taping, third process consists of crimping and hardware connecting section and last process is testing. It is not just assembling of the raw materials but manufacturing of wire harness. Raw material and the product which gets manufactured had distinct identity and are separately marketable. Both have different utility. Product so manufactured can no more be regarded to be raw material. Our attention was drawn towards pg. 106-120 to explain the nature of the product and how it is being used. Both units are independent. There is no bar under the section that both the units cannot be installed under the same premises. The units even though are under connected premises, but are separately identifiable. It is not a case of reconstruction of the business already in existence. There is no transfer of existing assets. Our attention was drawn in this regard on the decision of the Hon'ble Supreme Court in the case of Textile Machinery Corporation Ltd. vs. CIT, 107 ITR 195 (SC) wherein it was categorically held that to constitute reconstruction there must be transfer of the assets of the existing business to the new industrial undertaking. The business of the old unit is being carried out without second unit.
7 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10)
4. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. The provisions of Sec. 80IB lays down that „where the gross total income of an Assessee includes any profit and gains derived from any business referred to in sub-section (3) to (11), (11A) & (11B) there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section'. Sub-section (2) lays down the conditions which must be fulfilled by an industrial undertaking which are re-produced as under :
―80IB(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India :
Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words ―not being any article or thing specified in the list in the Eleventh Schedule‖ had been omitted.
Explanation 1.-- For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :--
8 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10)
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India ;
(b) such machinery or plant is imported into India from any country outside India ; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2.-- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with ;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.‖ 4.1 We noted that the Revenue is of the opinion that the unit established by the Assessee for manufacturing of wire harness is not a new industrial undertaking, it is not engaged in manufacturing or production of an article or thing, Unit-I & II both are same. We noted from the paper book and the process of manufacturing that Unit-II established by the Assessee manufactures entirely different product. No doubt, this product is used in lift control but the harness wire has a separate identity and is marketable independently. The process consists of wire cutting and stripping, wire bundling and taping, crimping, hardware connection section and testing. The finished product which comes out cannot be regarded to be raw material. Manufacturing is the end result of one or more processes through which the original commodity is made to pass. Sec. 80IB does not define the word „manufacture‟. The word „manufacture‟ was earlier defined under explanation (3) to Sec. 10B for the purpose of that section to include any - (a) process or (b) assembling or (c) recording of programme on disc, tape, perforated media or other information storage device. Thus, „process‟ 9 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) was included within the word manufacture for the purpose of sec. 10B. Explanation (iv) of the said sec. 10B further provided that the word „produce‟ for the purpose of said section, in relation to any article or thing shall include production of computer programme. The definition given under this section is, in our opinion, equally applicable for the word „manufacture‟ and „production‟ to determine whether the Assessee manufactures or produces any article or thing. CBDT in its circular no. 528 dt. 16.12.1988 clarified that the expression „manufacture‟ for the purpose of both sections 10A and 10B of the said Act would include any processing or assembling or recording of programme on disc, tape, perforated media or other information storage device. This definition of „manufacture‟ was removed when sec. 10A and 10B of the Act were amended by the Finance Act, 2001 w.e.f. 01/04/2001. Sections 10A and 10B of the Act were further amended by the Finance Act, 2003 w.e.f. 01/04/2004 and the definition of „manufacture‟ was inserted as under:-
―Explanation (iv) - For the purpose of this section, ‗manufacture or produce' shall include the cutting and polishing of precious and semi-precious stones.‖ The provisions of Sec. 10A & 10B were substituted by the new provisions by the Finance Act, 2000 and simultaneously provisions of Sec. 80I were substituted by Sec. 80IA and 80IB. U/s 10B the word „manufacture‟ has been defined as under :
―manufacture‖ shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005.
Subsequently, Special Economic Zone Act, 2005 was passed by the Parliament in May, 2005, which was brought into effect w.e.f. 23/06/2005. Section 2(r) of Special Economic Zone Act defines the expression „manufacture‟ as under:-
―Manufacture‖ means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinct name, character
10 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisci culture, poultry, sericulture, aviculture and mining‖.
This definition was adopted by the Legislature in section 10AA w.e.f. 10/02/2006 as adopted by the Special Economic Zones Act, 2005 by inserting Explanation 1(iii) to section 10AA of the Act which reads as under:-
(iii) ‗Manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zone Act, 2005.
As per the said definition „process‟ is included in manufacture.
Subsequently, by the Finance Act, 2009 w.e.f 1.4.2009, clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 defining the expression "manufacture as under:
―manufacture‖, with its grammatical variations, means a change in a non-living physical object or article or thing,-
(a) Resulting in transformation 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.‖ 4.2 In CIT Vs N.C. Budharaja & Co. (1993) 204 ITR 412 (SC), Hon‟ble Supreme Court further observed that the word "production" is much wider than the word "manufacture". It was said (page 423):
―The word ―production‖ has a wide connotation than the word ―manufacture‖. While every manufacture can be characterized as production, every production need not amount to manufacture...
The word ‗production' or ‗produce' when used in juxtaposition with the word ‗manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.‖
11 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) 4.3 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon‟ble Supreme Court defined the word „production‟, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word "production" in the Oxford English Dictionary, as meaning "amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort". For the wide definition of the word „production‟, it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word „production‟ since ore is „a thing‟, which is the result of human activity or effort.
4.4 According to Webster International English Dictionary, the verb "produce" means to bring forward, beget, etc. The juxtaposition of the word "manufacture" with „agriculture‟ and „horticulture‟ is significant and cannot be lost sight of. The intention in employing the word "produced" obviously was to introduce an element of volition and effort involving the employment of some process for bringing into existence some goods.
4.5 The Hon‟ble Kerala High Court had the occasion to consider whether assessee is engaged in the manufacture or production of an article or thing when assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285. Hon‟ble High court noted in that case that the Revenue‟s stand is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as „manufacture‟ or „production‟ of an article qualifying for exemption. Hon‟ble Kerala High Court considered the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s 10A of the Act and units 12 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) in the free trade zone provided u/s 10AA of the Act and the exemption available to 100% EOU u/s 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature. Hon‟ble Kerala High Court also considered the judgment in the decision of Supreme Court in Tara Agencies (292 ITR 444 (SC) relied upon by the Sr. Standing Counsel for the revenue, wherein Hon‟ble Supreme Court clearly held that blending of tea does not amount to „manufacture‟ or „production‟ of an article or thing, but is only processing. Hon‟ble High Court allowing the appeal of the assessee held that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognized as a 100% EOU division and the Department had no case that the assessee‟s unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial units of the assessee‟s 100% EOU, it would defeat the very object of section 10B of the Act. (similar to assessee‟s case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon‟ble High Court held as under:
―The finding of this court is that the purpose of incorporation of section 2(r) of the Special Economic Zones Act, 2005, into section 10AA of the Income-tax Act is to provide a liberal meaning to the word ―manufacture‖ which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of ―manufacture‖ contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of the counsel for the assessee is that the purpose of removal of the definition of ―manufacture‖ from section 10B was not to provide a restricted meaning for that term contained in the main section because if that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been
13 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) approved as a 100 per cent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 40 of the Industries (Development & Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note the products for which the assessee's unit is recognized as a 100 per cent export oriented unit are tea bags, tea in packets and tea in bulk packs. In fact, the assessee is exclusively engaged in blending and packing of tea for export and is not manufacturing or producing any other article or thing. Still it is recognized as a 100 per cent export oriented unit by the concerned authority within the meaning of that term contained in the definition clause of section 10B of the Income-tax Act and the Department has no case that the assessee's unit engaged in export of tea bags and tea packets is not a 100 per cent export oriented unit. So much so, in our view, if exemption is denied on the ground that products exported are not produced or manufactured in the industrial unit of the assessee's 100 per cent export oriented unit, the same would defeat the very object of section 10B. Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, will continue to enjoy tax exemption under section 10A and section 10AA respectively. The still worse position is that the appellant would be denied of export exemption available under section 80HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies' case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export processing zones, free trade zones and to 100 per cent export oriented units covered by sections 10A, 10AA and 10B of the Income-tax Act. Therefore, following the judgment of this court above referred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant's entitlement for exemption.‖ The Hon‟ble High Court in this case, in our opinion, has clearly laid down that once the assessee is recognized as a 100% EOU for engaging in an activity and assessee is engaged in the same very activity, if the exemption is denied to the assessee on the ground that there is no production or manufacturing but only processing of the products exported in the 100% export oriented unit, the same would defeat the very object of section 10B. The Hon‟ble high court took the view that the decision of the Hon‟ble Supreme Court in Tara Agency‟s case 292 ITR 444 will not apply even though Hon‟ble Supreme Court in that case has held that blending of tea does not amount to manufacture or production of an 14 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) article but is only processing. Thus, the Hon‟ble Kerala high court in the case of Tata Tea Ltd. (supra) gave the clear cut finding impliedly that even if the assessee is engaged in processing and is recognized as 100% EOU, it will be entitled for exemption claimed u/s 10B of the Act.
4.6 We noted the decision of Hon‟ble Special Bench in the case of Madhu Jayanti International Ltd. and Others Vs. DCIT wherein the question for consideration and decision of the Special Bench was:
―Whether on the facts and in the circumstances of the case, the Assessees, who are in the business of blending & processing of tea and export thereof, can be said to be ―Manufacture/Producer‖ of the tea for the purpose of Section 10A/10B of the I.T. Act, 1961?‖ The brief facts in the case of Madhu Jayanti International Ltd. in ITA No. 1463/Kol/2007 were that the assessee was engaged in the business of manufacturing, processing, exporting and dealing in various commodities, more particularly tea, coffee, jute, pepper, chillies, cardamom, turmeric and similar other spices, etc. The assessee, as per the claim is a 100% EOU within the meaning of section 10B of the I.T. Act, 1961 and claimed exemption under that section. The assessee buys tea from auctions held in Tea Board recognized Auction centres at Kolkata, Guwahati, Siliguri, Cochin, Coimbatore and Coonoor. The assessee conceded the factual position that it imports small quantity of tea of the type and quality not produced in India. It further conceded the factual position that it does not grow or manufacture any tea. According to the assessee, tea so bought in different auctions is processed with a view to remove all dust and foreign substances and thereafter it blends different varieties of tea to make it of „uniform and consistent‟ quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claimed exemption u/s 10B of the Act in respect of 15 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) its 100% EOU for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The AO rejected the claim of assessee of exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:-
―32. The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression "Existing Special Economic Zone" to mean every Special Economic Zone which is in existence on or before the commencement of the said Act. Section 2(e) defines the expression "existing unit" to mean every unit which has been set up on or before the commencement of the said Act in an existing Special Economic Zone. In other words, admittedly all Special Economic Zones were also being governed by the Exim Policy prior to the enactment of SEZ Act, 2005. Clause
(iii) of Explanation 1 to section 1OAA lays down that the expression "manufacture"
shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, which definition is 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, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandly, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining".
In Exim Policy, the expression "manufacture" is defined, in paragraph 9.30 & 9.31 thereof almost in the same manner as in the Special Economic Zone Act, 2005, which is 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, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining."
16 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) But the only difference between the Exim Policy of 2002-07 and of 2000 is that words "and segregation" which were appearing in the definition of the expression 'manufacture" in the Exim policy of 2000 was deleted in the Exim Policy of 2002-07. Further, even in Prevention of Food Alternation Rules, 1955, it has been inter alia stated that ―Tea used in the manufacture of flavoured tea shall conform to the standards of tea. The flavoured tea:manufacturers shall register themselves with the Tea Board before making flavour tea In The Tea (Distribution & Export) Control Order, 1957 issued by the Government of India, Ministry of Commerce & Industry (Department of Commerce) the expressions "flavour tea", "green tea" "instant tea", "packet tea" "quick brewing black tea", "tea" and "test bag" have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions "manufacturer", "Buyer", "Packet Tea", "Tea Bag",-
"Green Tea", "Quick Brewing Black Tea", "Instant Tea" and "Made Tea" have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression "manufacture" as under:
"manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing, -
(a) resulting in transformation 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 aforesaid definition of the expression "manufacture", although brought into the statute book w.e.f. 01.04.2009, was applied by the Hon'ble Supreme Court even for the assessment year 2001-02 in ITO v. Arihant Tiles and Marbles Pvt. Ltd. (2010) 320 ITR 79, 82 (SC) on the ground that Parliament had taken note of ground reality in inserting section 2(29BA) in the Income Tax Law. The said definition was again applied by the Hon'ble Supreme Court in CIT V. Emptee Poly-Yarn Pvt. Ltd. (2010) "Green Tea" means the variety of manufactured tea commercially known as green tea; 320 ITR 665,667 (SC).
33. The Assessee Company carries out its operations of blending, packaging and export of tea bags, tea packets and bulk tea packs in its modern factory, well equipped with all imported and sophisticated automatic plant and machineries with the help of over 100 workmen engaged on contract basis through M/s. Trot Pvt. Ltd. The manufacturing'. operations are carried in its said factory situated at 19/4A, Munshiganj Road (under Falta Export Processing Zone), Kolkata. We find from facts of the case that the details of turnover of the assessee shows Bulk Tea (0.94%), Packet Tea and Tea Bags .(99.06%),. as. per different descriptions, brand names 17 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) and varieties, as listed APR. Assessee Company is duly registered as a 100% EOU by the Government of India, Ministry of Industry, Department of industrial Policy and Promotion Secretarial for Industrial Approvals, ECU Section in the state of West Bengal for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt. in terms of Registration Certificate dated 26th December, 1995, inter alia, with the condition that its 100% production (excluding rejects not exceeding 5%) would have to be exported and that its registered EOU Unit shall make value addition to a minimum extent of 79%. Undisputedly, the exported consumer products, blended by Assessee in its said factory premises is a case of substantial value addition, as compared to the unblended black tea in granule and dust form normally available for sale in the open retail market throughout India.
34. The subject for consideration under sections 10A and/or 10B of the said Act is manufacture / production of tea ; the object being grant of benefits of tax exemption to exporters carrying out their operations in FTZ, EOU, EPZ & SEZ areas in accordance with the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Distribution & Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above.
35. We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-
04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture' which included 'processing' contained in section 1OB of the Act was deleted w.e.f. 01.04.2001. The argument of the department is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending "and packaging of tea for export was treated as 'manufacture' or 'production' of an article qualifying for exemption. We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. TOA of the Act and units in the free trade zone provided u/s, 10AA of the Act and the exemption available to 100% EOU u/s. 1OB of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature is correct. We find that Hon'ble Kerala High Court also considered the judgment in-the decision of Supreme Court in Tara Agencies, supra relied on by the Ld. CIT, DR, wherein Hon'ble Supreme Court clearly held that blending of tea does not amount to 'manufacture' or 'production' of 18 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) an article, but is only processing. We find that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act.
36. We, in view of the above, hold that when the products for which the assessee's unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of Section 10A, 10AA and 10B, we have to consider the definition of the word "manufacture" as defined in Section 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order, 2003, etc. We also find that the definition of 'manufacture' as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `manufacture' under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we "hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act.
37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s.10B of the Act. Further, assessees who are in the business of blending and processing of tea hi respect of undertakings in free trade zones are manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A of the Act. We have examined and discussed the facts in the case of Madhu Jayanti International Ltd. and found that there is blending of tea and consequently the assessee is eligible for exemption u/s. 10B of the Act as prayed for. Their appeal for the AY 2004-05 is allowed. As regards other appeals and that of the interveners, the matters are restored back to the Division Bench, with directions to decide those appeals in the light of principle laid down herein, so far as the claim for relief u/s. 10A or 10B of the Act in accordance with law.‖ 19 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) From the reading of para 35 of the aforesaid judgment we noted that the Special Bench in this case clearly held that the assessee was engaged only in processing and was not engaged in the manufacture or production but had ultimately under para 36 it took the view in view of the fact that the definition of „manufacture‟ u/s 2(r) of the SEZ Act, 2005 which is incorporated in section 10AA w.e.f. 10/02/2006 includes „processing‟. Therefore, following the decision of Kerala High Court in the case of Girnar Industries and Tata Tea Ltd. (supra) held that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea.
4.7 We have also gone through the decision of Hon‟ble Supreme Court in Indian Cine Agencies Vs CIT 308 ITR 98. In this case the question before the Hon‟ble Supreme Court was: When the assessee was engaged in the activity of cutting jumbo roll films into flat and small rolls in desired sizes, whether such activity undertaken by the assessee was manufacture or production? In this case, the Hon‟ble Supreme Court after discussing various cases, the provisions of different Acts and the dictionary meaning took the view that the assessee was engaged in manufacture / production. While holding so under para 12 of its order, Hon‟ble Supreme Court has given the same analogy for the purpose of eligibility of deduction under section 80HH and 80-I as has been given by the Kerala High Court in the case of Tata Tea discussed herein above for the purpose of section 10B, that if there was no manufacturing activity, then the question of referring to item 10 of Eleventh Schedule for the purpose of exclusion does not arise. From this judgment, thus, it is apparent that the Hon‟ble Apex Court accepted that manufacture/production includes processing also.
4.8 We have also gone through the decision of Hon‟ble Supreme Court in the case of ITO Vs. Arihant Tiles and Marbles Pvt. Ltd. 320 ITR 79(sc). In this case 20 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) when the assessee was engaged in the activity of cutting and polishing of marble blocks, the question before the Supreme Court was whether the activities undertaken by the assessee would fall within the meaning of the words „manufacture or production‟ in section 80-IA of the Income-tax Act, 1961? In this case, Hon‟ble Supreme Court, after discussing the definition of „manufacture‟ given in section 2(29BA) of the Income-tax Act, 1961 and also discussing the provisions of section 80-IA(2)(iii) and after going through various decisions, held as under:
―22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961.
23. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961.‖ In this case also, Hon‟ble Supreme Court took the view that cutting and polishing of the marble blocks is the activity which constitutes „manufacture or production‟ as after processing marble block no more remains as marble block.
21 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) This decision has also duly considered, in our opinion, whether the activity of processing is manufacture / production. We also noted that in the following cases also it was held that the process undertaken by the Assessee is manufacture :
i) Poonam Chand Prem Raj vs. CIT, 207 ITR 895 (Raj)
ii) CIT vs. M.R. Gopal, 58 ITR 598 (Mad)
iii) CIT vs. Janak Raj Bansal, 229 CTR (HP) 89
iv) CIT vs. Kanam Latex Industries P. Ltd., 221 ITR 1 (Ker)
v) CIT vs. Darshak Ltd., 247 ITR 489 (Kar)
vi) CIT vs. Gem India Manufacturing Co., 249 ITR 307 (SC)
vii) CIT vs. Premier Tobacco Packers P. Ltd., 284 ITR 222 (Mad)
viii) CIT vs. Esquire Translam Industries, 344 ITR 308 (Mad)
ix) Titanor Components Ltd. vs. CIT, 9 Taxman.com 234 4.9 In the case of the Assessee we noted that once the wire is cut and stripped after going through different process and testing an entirely new product comes which has a different utility which is being used in electronic industry for elevators. This wire harness has independent identity and can be sold in the market. This product no more remains the ordinary wire. Therefore, we agree with the ld. AR that Unit-II is engaged in manufacturing of a separate product. We do not agree with the ld. DR that if two units are established under the same roof even though they are having separate identity they cannot be regarded to be separate industrial undertaking. Both the units are having independent identity, manufacturing different products, having different machinery. They are not inter-dependent for manufacturing their product, therefore, it cannot be said that the units are not independent. It is not the case of the Revenue that the Assessee has established the unit by splitting up or reconstruction of business which is already in existence. The new unit has also not been formed by transferring to 22 ITA NOS. 147 TO 152/PNJ/2014 (ASST. YEAR : 2004-05 TO 2009-10) the new business machinery and plant previously used for any purpose. In respect of the condition about the employment of the employees, we noted that the CIT(A) has given a clear-cut finding that there are more than 10 employees employed in Unit-II in addition to the contract and casual labour. We, therefore, do not find any illegality or infirmity in the order of CIT(A). CIT(A) has given a finding of fact after going through the records and bills. The ld. DR even though vehemently contended that the Assessee is not eligible for deduction u/s 80IB, could not adduce any cogent material or evidence which may compel us to reverse the finding given by CIT(A). We, accordingly, confirm the order of CIT(A).
5. In the result, the appeals filed by the Revenue stands dismissed in all the years.
6. Order pronounced in the open court on 04.09.2014.
Sd/- Sd/-
(D.T.Garasia) (P.K. Bansal)
Judicial Member Accountant Member
Place : PANAJI
Dated : 04/09/2014
*SSL*
Copy to :
(1) Appellant
(2) Respondent
(3) CIT concerned
(4) CIT(A) concerned
(5) D.R
(6) Guard file
True copy,
By order