Income Tax Appellate Tribunal - Chandigarh
M/S Kinko Computer Industries, Solan vs Dcit, Parwanoo on 24 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
SMC, CHANDIGARH
BEFORE MS. DIVA SINGH, JUDICIAL MEMBER
ITA No. 377/Chd/2017
Assessment Year: 2012-13
M/s Kinko Computer I ndustries Vs. The DCI T
Vill- Bilanwala Labana, Circle, Parwanoo
PRG Dharamshala, Baddi
Solan
PAN No. AAJFK6184C
(Appellant) (Respondent)
Assessee By : Shri Sudhir Sehgal
Revenue By : Shri Manjit Singh
Date of hearing : 28/11/2017
Date of Pronouncement : 24/01/2018
ORDER
PER DIVA SINGH, J.M.
The present appeal has been filed by the assessee assailing the correctness of the order dated 16/01/2017 of CIT(A) Shimla, pertaining to 2012 - 13 assessment year on the following grounds:
1. That the Worthy Commissioner of Income Tax (A) has erred in confirming the order of the Assessing Officer with regard to disallowance of deduction u/s 80IC on manufacturing of External Hard Disk and External DVD Writer and further enhancing the income of the assessee by disallowing the deduction u/s 80IC, entirely to the tune of Rs. 1,84,64,919/- as claimed by the assessee.
2. That the finding of the Ld. CIT(A) that the activity undertaken with regard to the manufacturing of Laptop and Mouse, External Hard Disc and 'External DVD Writer' do not amount to manufacturing, is not a correct finding and deserves to be quashed.
3. That the finding of the Worthy CIT(A) while disallowing the deduction u/s 80IC is against the facts and circumstances of the case and the submission as made during the course of appellate proceedings have not been considered properly.
2. The relevant facts of the case are that the assessee declared an income of Rs. 18,140 after claiming deduction under section 80 IC. The said return was selected for scrutiny. The assessing officer takes note of the fact that the assessee firm claimed that it was engaged in manufacturing and trading of computer parts and peripherals from village Billanwalau Ibana, PRG Dharmshala. The assessee firm it was noted by him comprised of five partners 1 ITA No. 377/Chd/2017 namely M/s Champion computers Pvt. Ltd. (5% share), Sh. Kapil Wadhwa (25%), Sh. Sanjay Wadhwa (25%), Kapil Wadhwa HUF (15%), Sanjay Wadhwa HUF(15%) and V.P. Wadhwa HUF(15% Share). In the course of the scrutiny proceedings, he required the assessee to explain the manufacturing process of the specific items claimed to have been manufactured by it. In response to the same flow chart of processes reproduced at pages 2 and 3 of the assessment order and details of manufacturing activities set out in pages 4 and 5 of the assessment order were provided. The AO was of the view that the assessee needed to demonstrate that the commodity which was subjected to the process of manufacture could be identified as a different character in name as well as in use i.e; a distinct commodity had come into creation as a result of his manufacturing activity. Reliance was placed upon the decision of Hon'ble Supreme Court in case of Dy. CST vs. Pio Food Packers, (1980) 46 STC 63.
2.1 Accordingly for the reasons set out in para 6 and 6.1 the AO allowed the deduction for the manufacturing of laptops and mouse and rejected the claim of manufacture / production of External DVD Writer and External DVD.
2.2 The assessee carried the issue in appeal before the CIT(A) who considering the submissions advanced concluded that infact there was no manufacturer of any product. He noted that the manufacturing expenses, salary expenses etc. debited in the profit & loss account were negligible. There was no machinery to carry on the manufacturing process. The assessee was accordingly required to justify its claims. After hearing the assessee he held that the AO was justified in denying relief qua the two products and issued an enhancement notice for justifying why even the deduction allowed by the AO not be withdrawn for Laptops and mouse. The specific reason set out in the show cause notice read as under: -
a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P&L account includes only purchase cost and cartage inwards cost.
c. No expense on manufacturing has been debited to the P&L account. d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no manufacturing has been carried out by you.
2.3 Rejecting the explanation offered which have been reproduced in the impugned order at page 8 to 15 of the impugned order the CIT(A) held that the assessee did not pass the litmus test as a result of which 80 IC deduction qua the manufacture of External hard disk and DVD writer which was denied to the AO was confirmed and even qua the laptops and mouse the deduction Page 2 of 23 ITA No. 377/Chd/2017 allowed was withdrawn. Aggrieved by this the assessee is in appeal before the ITA T.
3. The Ld. AR referring to the submissions advanced before the assessing officer and the CIT-A submitted that in the facts of the present case the conclusions drawn by the assessing officer qua the two products and the conclusion drawn by the CIT-A in withdrawing the deduction allowed by the AO on facts was on an incorrect appreciation of law and facts. It was his submission that the Revenue has proceeded entirely on suspicions. Inviting attention to the assessment order it was submitted that whereas the assessing officer had disallowed the benefit of the deduction only on account of the manufacture of two products namely External hard disk and External DVD writer, the CIT-A after issuing enhancement notice has included the other 2 products also manufactured by the assessee namely Computer laptops and Computer mouse. Addressing these two products it was submitted that the AO had allowed deduction only after considering the full facts and after duly satisfying himself qua the claim of the taxpayer. The withdrawal of the deduction by the CIT(A) in the appellate proceedings, it was submitted was not maintainable.
Similarly the CIT(A) on facts it was submitted was not justified in confirming the view of the AO qua the relief claimed for the other two products, manufactured.
3.1 Referring to the synopsis filed it was submitted that the assessee firm had started the business of manufacturing/production of computer laptops including peripherals like computer mouse external DVD writer and external hard disks in 2010-11 assessment year. Accordingly it was his submission that 2010-11 AY was the first year of operation wherein the declared turnover from the Manufacturer of these 4 products was Rs. 39,08,250/- on which the eligible profit was Rs. 5,68, 860/-. After audit of the books of account and filing of the audit report duly certified by a chartered accountant and filing of form No. 10 the deduction under section 80 IC was claimed by way of a return filed on 14/10/2010 to the tune of Rs. 5,51,763/- declaring a total income of Rs. 17,100/- the said return was duly processed under section 143 ( 1) and has attained finality.
3.2 Similarly in 2011 - 12 assessment year carrying out the very same activity the assessee declared a turnover of Rs. 3,00,30,984/- on which a profit of Rs. 92,42,715/- was declared. The claim of 80 IC deduction it was submitted was Page 3 of 23 ITA No. 377/Chd/2017 similarly supported by audit report duly certified by a chartered accountant after getting the books of accounts audited and considering the form 10 CCB filed in support of the claim on 10/09/2011 claiming 80 IC deduction to the tune of Rs. 92,30,390/- and declaring a total income of Rs. 12,330/-. The said return was also processed under section 143 and had attained finality. Thus it was his submission that since in the year under consideration also the assessee was carrying on the very same activity the occasion for the Department to deviate from the consistent view taken for the very same activity was contrary to the settled legal position. It was submitted that the fact on record that the assessee fulfilled all the conditions prescribed under the act and there is no new material on the basis of which the view has been varied the order of the CIT(A) ran counter to the following decisions:
1. Judgment of Hon'ble Punjab & Haryana high Court in case of CIT Vs. Micro Instruments Company & Ors. (2016) 97 CCH 0001
2. Judgment of Division Bench of the Bombay High Court, in case of CIT Vs. Paul Brothers, [1995] 216 ITR 548
3. Judgment of Gujarat High Court in case of Saurashtra Cement and Chemical Industries ltd. Vs. CIT [1980] 123 ITR 669
4. Judgment of ITAT Chandigarh Bench in case of Shiva Exports Vs. ITO [2009] 28 SOT 512 (Chd.) 3.3 On the merits of the addition it was submitted that the specific reasons for not allowing the assessee's claim have been set out by the CIT(A) in para 6.1 of his order. Carrying through the specific finding in para 6.1 it was submitted that the CIT(A) has arbitrarily come to the conclusion that no Manufacturing had been carried out by the assessee even in regard to laptops and mouse also.
Carrying the Bench through the para 6.1.1 to 6.1.5 from pages 18 to 22 of the impugned order it was submitted that the CIT-A came to the conclusion that no Manufacturing expenses have been debited in the profit and loss account, no qualified personnel was on the rolls no testing equipment or machinery etc. was seen in fixed assets etc. accordingly the assessee was held to have failed to satisfy that it was carrying on any manufacturing activity. The conclusion was supported by the decision of the ITAT in the case of Indian software vs. ITO in ITA 248/Chandigrah/2015. It was his submission that the said decision is not applicable and was fully distinguishable on facts. The conclusion was assailed as having been arrived at on an incorrect appreciation of facts. Inviting attention to the assessment order it was submitted that the entire process has been explained by the assessee before the assessing officer qua the 4 products. Considering this qua the 2 products deduction under section 80 IC has been Page 4 of 23 ITA No. 377/Chd/2017 granted by the AO himself and qua 2 products the assessing officer has denied the relief. Referring to this it was submitted the process of manufacture admittedly is available on record and has been elaborated and discussed in the detailed assessment order itself on record which apparently the Ld. CIT-A while withdrawing the relief granted failed to even consider or refer to in his order. The specific flowchart it was submitted is available at pages 2 to 4 of the assessment order and is available in the Paper Book filed before the AO as well as the CIT(A). Referring to the same it was submitted each of the steps have been elaborately discussed. Thus it was argued that on this incorrect appreciation of facts itself the claim of the assessee deserves to be allowed. Apart from that it was submitted that even before the CIT(A) the said explanation is offered by the assessee as would be evident from para-6.1.2 and it would show that the CIT(A) has held that Inspection, testing, branding, packaging, clearing and shipping etc are activities not unique to manufacturing. It was his submission that the assessee is not saying that these are unique to manufacturing the assessee was merely demonstrating that what are the steps taken and thus, it was argued the claim has been rejected on frivolous reasons. It was his submission that the CIT-A has held that the activity is mere assembly of different parts and the claim of the assessee has been rejected on the reasoning that the balance sheet did not show heavy deployment of capital assets or highly trained manpower etc. It was his submission that these are frivolous reasons and wrong facts. One of the assessee's partner Sh. Sanjay Wadhwa it was submitted was a qualified engineer. It was submitted that he was the technical expert under whose guidance the activities were carried on. The nature of the work it was submitted did not require highly qualified or technically competent people. The manufacturing process necessitated and entailed simple processes like soldiering, fitting and making the product functional and capable of running with the necessary software. Thus for creating the product heavy machinery was not required and it was submitted that there is no such mandate of the Legislature also that heavy machinery necessarily must be used. It was submitted that once the product which involves the assembly of the following separately identifiable parts are assembled, fitted, and made functional by programming and attaching wire, checked, packed and identified as a separate product which function distinctly for the functions identified as on independent product the statutory requirement is fulfilled. As an illustration it was Page 5 of 23 ITA No. 377/Chd/2017 submitted that external DVD Hard Disk entails the purchase of the following separate parts which are utilized:
1)casing which would constitute: a) housing/casing (upper plastic cover); b) housing casing/(lower plastic cover);c) front Bezel (front plastic cover);
2) USB port which would constitute of PCBA/computer circuit board with USB port;
3) USB cables which would include: a) USB cable; and b) connecting wire;
4) drive would include DVD drive;
5) screws; and6) branding stickers/labels.
3.4. It was his submission that each of these are separate items individually and collectively and cannot be called to be an external USB DVD unless and until they are assembled, fitted, made functional, and made fit for use by attaching wire, cased/housed and screwed thus made fit to be used.
3.5 Similarly for the product identified as External DVD Writer the necessary parts would remain the same as above except the specific programming would necessarily be different and more complex. The two products are separate and distinct from each other and also their independent parts.
3.6 Similarly Computer laptop and a computer mouse are bought and sold as separate and independent products from the sum total of their individual parts. Having different functions and have separate identity from the individual items purchased which are assembled together. Attention was invited to pages 7 and 8 of the synopsis. Taking as an example simpler of the two products as an illustration it was submitted that a computer mouse may appear to be a simple item but for manufacturing/producing the same following separate items need to be purchased which are separately identified and individually cannot be considered to b a computer mouse as a products. The individual parts are purchased and used all :
1) mouse PCB which would include : a) PCB ; b) IR Sensor;
2) mouse plastic which would include : housing/casing (upper plastic cover); b) housing casing/(lower plastic cover);
3) wire ;
4) screws and
5) branding stickers labels etc. 3.7 Thus it was his submission that none of these individual items purchased can be said to constitute a computer mouse it is only after the individual items are assembled fitted, soldiered made functional by running a software and made ready to use after screwing attaching a specific length and quality of Page 6 of 23 ITA No. 377/Chd/2017 wire ensuring and testing that the functions are performed by the left and right clicks etc. only thereafter it can be sold as a separate product as a computer mouse.
3.8 Accordingly as per settled legal principles it was his submission that there was no occasion either to withdraw the relief granted or to deny the relief which had been denied by the assessing officer for the assembly and manufacturer of these products. It was submitted that no doubt highly technical staff is not available however the fact that it is not required cannot be ignored as no software is required to be specifically written and no heavy machinery is required but the fact that by this activity a separate product comes into existence is the legal requirement which has been discarded on presumptions and surmises. Heavy reliance was placed upon the submissions advanced in Paras 6 and 7 and 8 of the synopsis filed these are reproduced hereunder for ready reference:
6. It is further submitted in this regard that, as a result of the processing / action done on the inputs procured, for the production of the impugned products in case of the assessee, the resultant products completely satisfy the said definition in this regard. Your attention in this regard is brought to the various inputs purchased for different items manufactured by the assessee firm namely:
Now it can been clearly seen that the components and inoputs purchased for each of the item lose their identity after the processing / assembly is done by the Page 7 of 23 ITA No. 377/Chd/2017 assessee firm for each of the product and are different from the final product obtained as a result of such assembly process.
7. Also, the aforesaid parts/ components were mentioned broadly during the assessment proceedings along with the process notes given for manufacture/ assembly of such products, as appearing on Page No. 2 & 3 of the assessment order and also during the appellate proceedings as appearing on Page No. 9 of the order of the Worthy CIT(A),. A copy of the said process notes of manufacture/ assembly with broad components, which are already on record, are also placed at pages 32 to 34 of the Paperbook attached.
Further it is also submitted in this regard that all the products of the assessee firm satisfy the impugned conditions of manufacture as prescribed under the Act, as pointed out in Point No. 5 of our submissions above. Your attention in this regard is drawn to the Table below showing the conditions being fulfilled by the assessee firm with regard to the definition of manufacture for each of the products separately.
Now, since all the four aforesaid products produced/manufactured by the assessee firm clearly satisfy the tests laid down in the definition of manufacture given in the Income Tax Act and even tests of marketability and value addition as laid down in various judgements in this regard, therefore there remains no dobut Page 8 of 23 ITA No. 377/Chd/2017 that the said process falls well within the meaning of manufacture / production as given under the Act.
8. It is further brought to your kind notice that the books of the assessee firm have not been rejected by the Ld AO or the Worthy CIT(A) and thus have been accepted for the facts therein, including the purchases, sales and expenses paid in that regard. This inturn means that, no doubt, has been raised on the Profitability of the firm and has been accepted as is.
i. Thus, the doubts raised with regard to the omissions of specialized plant & machinery, no separate manufacturing expenses other than the purchase cost of components and cartage paid, low electricity & low expenses incurred on personnel/ lack of qualified professionals, as clearly brought on record by the assessee during the assessment proceedings, do not warranty any finding in this regard as they are neither the conditions of manufacture/ production as prescribed in the section 80IC for the claim of deductions nor are they laid down as a necessary conditions for the manufacture / production process under the income tax act. Also, these items are industry specific and do not call for any generalized view in this regard as projected by the Ld. AO and the worthy CIT(A). Incase there was any doubt regarding the manufacturing process, this fact should have been brought on record by the Ld. AO though a finding of fact / enquiry in this regard, especially when the Ld. AO had all judicial powers of enquiry at his disposal under the Act, in this regard. Reliance in this regard is also placed on the judgment of the Hon'ble Supreme Court in the case of S.A. Builders vs CITas reported in 288 ITR page 1. in which, it has been held that the Assessing Officer cannot sit in the arm chair of a business man to decide the issues relating to the business expediency. Therefore, once the books of the assessee firm have been accepted beyond doubt, there remains no question on the lack of certain levels of plant and machinery / expenses as assumed to be apt by the Ld. AO.
ii. Infact, since the assessee firm had been carrying on the said business for two previous assessment years, the staff of the assessee firm had become autonomous for the said production activities using the toolkits/ equipments& computer for testing & soldering and did not require immediate supervision from the partners in this regard and, therefore, the partners could be stationed in Delhi, taking care of the marketing activities for the products instead of production during the relevant assessment year.
iii. Further the lack of qualified and sufficient personnel as alleged by the AO is completely not justified, where the sales of the assessee firm have not been doubted and accepted, as is and similarly, no doubts have been raised on the production facility of the assessee firm, thereby indicating that the production has, infact, taken place at the rented premises of the assessee firm and therefore there without finding any defect in the books of account, the allegation of lack of employees and qualified personnel is not justified, where infact the partners themselves could have been a part of the production team.
Also, even the' Worthy CIT(A) has resorted to reiterating the opinion of the AO, in this regard without bringing on record any material in this regard. The Worthy CIT(A) has also alleged that the assessee has not been able to prove his case of being a manufacturer, based on his assumptions, without bringing out any finding in this regard. Once the books and activity carried out by the assessee is accepted/ not doubted, then the onus to prove that the assessee was not involved in the activity of manufacture/ production is on the department. Infact the discussion that remains is pure academic only as to whether the activity of the assessee is covered under the definition of manufacture/ production or not, for it to claim deduction u/s 80IC of the Act.
Reliance in this regard is also placed on the judgement of the Jurisdictional bench of ITAT in the case of M/s Shoghi Communications Limited vs DCIT, in ITA No. 359/Chd/20~05 dated 04.08.06 wherein it has been that low electricity cannot be a basis for doubting the manufacturing/ production activity Page 9 of 23 ITA No. 377/Chd/2017 undertaken by the assessee firm, as placental page 22 of the Judgement set being furnished alongwith.
3.9. Reliance was placed upon para-9 of the written submissions and the decisions cited therein. The same is reproduced hereunder for ready- reference:-
9. It is further submitted in this regard that most of the activity being carried out in this industry falls within the ambit of/Assembling activities, which is in turn a type of manufacturing/ production activity, which however has been distinguished form the manufacturing in the excise law, with a view to promote such industry in the country by way of giving them exemptions from payment of excise duty, in which most of the components even till date are imported from outside the country for the want of specialized machinery and research St development in this regard.
Infact, the assembling activities cannot be considered out of the definition of manufacture by any stretch of imagination and therefore such a disallowance is not called for in the case of the assessee.
Reliance in this regard is placed on the following judgments of various High courts and Tribunals, wherein it has been held that Assembly clearly amounts to manufacture, in the cases of:
✓ CIT vs. MAHESH CHANDRA SHARMA (2009) 308 ITR 0222 (PaH HC)ar page 33 of the Judgment Set "Deduction under s. 80-IB-Manufacture or production-Assembly of motorcycle wheel- Motorcycle wheel assembled by assessee by using rim, tube, tyre, bearing, drum, spoke, nipple and collar resulted in an article distinct in name, character and use hence 'manufacture' eligible for deduction under s. 80-1B-Finding arrived at by Tribunal is a finding of fact not giving rise to any substantial question of law"
CIT vs. JACKSON ENGINEERS LTD. (2012) 341 ITR 0518 (DEL HC) CIT vs. CHIRANJJEEVI WIND ENERGY LTD. (2011) 333 ITR 0192 (Madras HC)at page 38 of the Judgment Set ACIT vs. DIXON TECHNOLOGIES (I) (P.) LTD. (2013) 35 CCH 0484 (Del Trib) CIT vs. TATA LOCOMOTIVE & ENGINEERING CO. LTD. (1968) 68 ITR 0325 (BOM)ar page 41 of the Judgment Set From the above it can be clearly inferred that assembly of goods infact amounts to manufacture, as held in the various judgements above. The Ld. AO and the worthy CIT(A) have completely overlooked the said facts and without bringing any relevant material on record, have made such heavy disallowances in the case of the assessee, which is both bad in law and against the facts and circumstances of the case.
10. Further reliance in this regard is placed on the following Judgements of the Apex Court and jurisdictional ITAT, in support of the fact that the process undertaken by the assessee amounts to manufacture, namely:
India Cine Agencies: Computer Graphics Ltd vs CIT, (2009) 308 ITR 98 (SC)aU5age 44 of the Judgment Set "The assessee converted jumbo rolls of photographic films into small flats anchfQlls^in the desired sizes. It claimed that the same amounted to manufacture/production for the purpose of allowances under sections 32AB, 80HH and 80-1 of the Income-Tax Act, 1961. The High Court held that it did not.Page 10 of 23 ITA No. 377/Chd/2017
The assessee appealed to the Supreme Court: Held: reversing the decisions of the High Court, that the assessee was entitled to the allowance under sections 32AB, 80HH and 80-1."
Vijay Ship Breaking Corpna Others v. CIT (2009) 314 ITR 309 (SC)at page 46 of the Judgment Set The assessee was entitled to allowance of deduction under 80-1 in respect of profits from ship building activity, because ship-breaking activity gave rise to the production of a distinct and different article CIT vs M/S Oracle Software India Ltd (2010) 320 ITR 546 (SC) at page 50 of the Judgment Set Further reliance in this regard is place on the judgement of the Jurisdictional bench of ITAT in the case of Surya Telecom Pvt. Ltd vs Department Of Income Tax in ITA No. 182/Chd/2010 dated 30.08.2010, wherein the laying of various electrical items & frequency synthesization have been held to be manufacturing, even though the technical parts were imported from outside the country, as highlighted at pages 64 to 66 of the Judgment Set and wherein it was held as under:
"15. ...In the facts of the present case before us, where the assessee was carrying on one of the activities of manufacturing process, which itself is manufacturing and merely because the assessee was not carrying on the other activities envisaged by the Assessing Officer, does not disentitle the assessee from the claim of deduction u/s 80IC of the Act. The activities being carried out by the assessee for the manufacturing of transceiver set and power supply equipment makes the product marketable for its ultimate use by the government agencies to whom supplies are being made by the assessee, entitles the assessee to the claim of the deduction u/s 80IC of the Act. We confirm the order of the CIT(A) in this regard."
3.10 Reliance was further placed upon the following decisions so as to argue that the process undertaken by the assessee amounts to manufacture :
a) India Cine Agencies: Computer Graphics Ltd. Vs. CIT, (2009) 308 ITR 98 (SC)
b) Vijay Ship Breaking Corporation & Others Vs. CIT (2009) 314 ITR 309 (SC)
c) CIT Vs. M/s Oracle Software India Ltd. (2010) 320 ITR 546 (SC) 3.11 The decision relied upon by the CIT-A in the case of M/s Indican Software Vs. ITO it was submitted is clearly distinguishable on facts. The issue in the facts of the said case was the activity of software production which was held questionable on the basis of the enquires made by the Inspector. In the facts of that case unlike the present case the activity was carried out for only one year and which has been distinguished point wise in the separate tabular synopsis filed separately. In the case of the assessee it was submitted the evidence is discarded on presumption as no such enquiries were made the said activity have been carried on by the assessee in the last two assessment years.Page 11 of 23 ITA No. 377/Chd/2017
3.12 Reliance was also placed on the meaning of production which has been held to be a term of much wider meaning than the word "manufacture" as considered by the Apex Court in the case of CIT Vs. N.C. Budharaja and Co. [1993] 204 ITR 412, as quoted in India Cine Agencies vs. CIT, Madras on 12th November, 2008 & various judicial pronouncements on page 423 that :
The word 'production' has a wider 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 reside rodeos which emerge in the course of manufacture of goods."
Further in the judgement of the Apex Court in the case of in India Cine Agencies vs Commnr. Of Income Tax, Madras on 12 November, 2008, it is has been held as under:
"11. In Advanced Law Lexicon, 3rd Edn. by P. RamanathaAiyar, the expressions 'production' and 'manufacture' are described as under:
'Production' with its grammatical variations and cognate expressions; includes-
(i) packing, labeling, relabelling of containers.
(ii) re-packing from bulk packages to retail packages, and
(iii) the adoption of any other method to render the product marketable.
'Manufacture' includes any art, process or manner of producing, preparing or making an article and also any article prepared or produced by manufacture. (Patent and Designs Act (2 of 1911), S.2(10).
Thus, where the Worthy CIT(A) in his order in Para 6.1.2 has alleged that certain steps undertaken by the assessing officer, namely; Physical Inspection, Testing/ Quality checking. Branding/ Labelling, Packing & Cleaning etc. ; are steps common to any trading activity, it is submitted in this regard that the Branding/ labeling activity has been specifically observed to be covered under the definition of Production and thus where Branding/ labeling is only one of the many activities undertaken by the assessee firm in relation to the production of the impugned goods, the said processes cannot be considered to be outside the purview of production (manufacturing) by any stretch of imagination and thus the disallowance of deduction made in case of the assessee firm deserves to be deleted.
3.13 Accordingly it was his submission that infact it is clearly a case of change of opinion on same set of facts by the AO and the CIT(A) as no fresh material has been taken on record to vary the conclusions. The past history of the assessee itself has been ignored on an arbitrary reasoning contrary to settled legal principles. The facts in assessee's own case it was submitted have been ignored. Accordingly it was his submission that the necessary relief in accordance with law may be granted to the assessee Page 12 of 23 ITA No. 377/Chd/2017
4. The Ld. Sr. DR Mr. Manjeet Singh reading through the assessment order and the impugned order submitted that admittedly the claim of the assessee has correctly been denied in view of the fact that there were a mere handful of employees barely qualified with absolutely no visible investment in machinery barring took kits/ laptops / computers etc. The absence of heavy machinery or any other major electrical expenditure are facts which come in the way of claim of carrying out the so called manufacturing activity. It was his submission that this was a mere assembly activity and not a manufacturing activity. The taxable income it was submitted has rightly been enhanced by the CIT(A). The decision relied upon by the CIT(A) it was submitted was fully applicable to the facts of the present case. The case laws relied upon in the paper book it was submitted do not help the assessee in any manner. In these circumstances relying upon the decision of the Apex Court in the case of Sun Engineering cases 198 ITR 298 (SC) it was his submission that picking a line or fact from one case and making the ratio Decidendi applicable to the other cases without establishing a parity on facts has been frowned upon. Accordingly it was his submission that he would heavily rely upon the CIT(A)'s order and the specific findings of the CIT-A in para-6.1 on the facts and submit that the order may be upheld.
5. I have heard the submissions and perused the material available on record. Before addressing the specific grievance of the assessee it would be appropriate to refer to certain facts available on record. It is seen that the AO required the assessee to justify its claim of manufacturing its four products for which 80IC deduction was claimed. The specific process undertaken were required to be addressed on the basis of which it was being claimed that a separate and distinct product came into being. The assessee as per page 2 and 3 of the assessment order, admittedly made available the following manufacturing process for producing the following products. For ready reference the relevant extract from the assessment order is being reproduced hereunder:
Page 13 of 23 ITA No. 377/Chd/2017 Page 14 of 23 ITA No. 377/Chd/20175.1 The assessee it is seen has also in order to substantiate its claim before the AO made the following submissions:
i) The assessee purchases various items from vendors in Nehru Place, New Delhi 9as per list of vendors submitted by the assessee).
ii) The assessee claims that it assembles various parts in its premises and assembly, testing, inspection, packaging of the products is done before the final dispatch.
iii) The assessee sells most of its final products to its sister concern M/s Champion Computers Pvt. Ltd. which is also situated in Nehru Place, New Delhi.
iv) Assessee has no plant & machinery in the Fixed Assets on the other hand.
v) For some products like computer/laptops, mouse assessee is doing either assembly or some processing but for Hard Disc Drive and DVD Writer assessee is only doing packing for these items.
5.2 The AO admittedly allowed the claim of the assessee qua the manufacturing activity of laptop and mouse and rejected the claim of manufacture of external hard disk and DVD writer. The specific finding of the assessing officer challenged in appeal before the Ld. CIT(A) is reproduced hereunder:-
6. In respect of various items produced by the assessee. it has been observed that in case o! Laptops; various loose parts are assembled, resulting into an integrated machine, which has a different character, name and use. I he same observation can be made in respect of assembly of various parts resulting into production of a Mouse. However, in the case of external Hard Disc Drive and external DVD Writer, it is observed that the assessee purchases functional I lard Disc-Drive and DVD Writer and puts the same into a casing produced separately and sells these products in the market.
6.1 In the ease of the assessee. it is clearly evident that the activities undertaken fail to pass the litmus test "'manufacture" as defined by the Income tax Act, due to the very basic reason that nomenclature, character and use of the products namely Hard Disc and DVD Writer remains the same. The only difference made at the premises of the assessee is that the Hard Disc /DVD Writer is put into a casing to be attached to a USB Drive. The Hard Disc or the DVD Writer has the same function or use even without the casing also and the casing merely provides an outer shell or packing to protect it from external factors. Merely putting the HDD/DVD Writer into a casing does not amount to manufacture/production by Page 15 of 23 ITA No. 377/Chd/2017 any stretch of imagination. Both the items are i.e. Hard Disc & External Casing are easily available in the open market and various online sixes. Any layman can purchase the two and put she functional disc into the casing without using even a screw driver.
(ii) Dissecting the claim of other activities being undertaken by the assessee in the process like testing, inspection etc. the facts as depicted in the balance sheet and P&L of the assessee and other documents submitted during the course of assessment does not prose the same. As per the schedule of fixed assets attached to the balance sheet of the assessee. there is no plant & machinery or testing equipment apari from a computer. The total electricty expenditure incurred by the assessee throughout the year is Rs. 19040/- which comprises of expenditure on electricity utilized for testing and lighting of factory premises of the assessee.
5.3 The assessee carried the issue in appeal before the first Appellate Authority who after show causing the assessee enhanced the income of the assessee by withdrawing the relief granted by the assessing officer. The specific reasoning on facts is found discussed in Paras 6.1.1 to 6.1.5 of the CIT(A)'s order. Same is reproduced hereunder for ready reference 6.1.1 A perusal of the said section, reproduced supra, shows that the assessee to claim deduction u/s 80IC is required to undertake and ma lufacture or produce any article or thing specified therein. The keyword is "manufacture". The A O . held that the assessee has not carried out manufacture w.r.t external hard disk drive and external DVD writers. This office vide the enhancement notice referred supra has show caused the appellant to explain why c eduction u/s 80IC even with respect to claim of manufacture of laptops and mouse should ^notibe disallowed. The detailed submissions of the appellant have already been reproduced supra and are not being repeated for the sake of brevity. The issue to be decided is whether the appellant is undertaking manufacturing to entitle it for claim of deduct under section 80IC.
6.1.2 The appellant in the case under consideration claims to derive income from manufacturing of computers and peripherals. The appellant in his submissions has detailed the various processes involved in assembly of laptops assembly of external hard disk drives and assembly of external USB DVD writers. The appellant has furnished no details of the requirements of steps involved undertaken to assemble/Manufacturer mouse. The perusal of the steps for assembly of the various items show that these steps involved are nothing but physical inspection, testing, branding, packing, cleaning, shipping, etcetera. These steps are not unique to manufacturing and are normally a part of any business involved in trading too. The only steps which can be deemed as unique to a manufacturing process are the steps listed at serial number 8/9 of the assembly of various parts. These steps involved installation of memory inside a barebone computer, installation of hard disk drive and loading operating system on the computer respect of laptops and assembly of drive in casing out of the various steps listed in assembly of hard disk drives and external USB DVD writers. The question that follows is that has the appellant discharged the onus on him to establish that he is carrying on manufacturing and does he have the resources and manpower to carry out a manufacturing as claimed by the appellate. A perusal of the material on record showed very glaring facts which could not be ignored. The name are listed as under:
a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P & L account include; only purchase cost and cartage inwards cost.Page 16 of 23 ITA No. 377/Chd/2017
c. No expense on manufacturing has been debited to the P & L account.
d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no manufacturing has been carried out by you.
6.1.3 Through the show cause notice for enhancement of incorr e u/s 251 of the I.T.Act issued to the appellant, the above observations made by this office were confronted to the appellant. The reply of the appellant is not reproduced for the sake of brevity, as it has already been reproduced in the earlier part of this order.
6.1.4 To decide the issue at hand , in this regard, from the details filed by the appellant it is seen that the information w.r.t. list of employees, fixed assets, cost of manufacturing are all very relevant details to decide the issue at hand.
The same are reproduced hereunder: -
Details of employees Name of employee Designation Educational Annual Nature of work ES PF Qualification Salary Payments Mr. Harminder Office 12th From PSEB 304584 Supervising office Nil Nil Singh incharge Mr. Gaurav Singh Hardware 12th 105967 Manufacturing Ni Nil Engineer Mr. Satish Kumar Hardware Pursuing B.A. From 100000 Manufacturing Ni Nil Engineer IGNOU Mr. Maneesh Hardware 12th From Board of 87500 Manufacturing Nil Nil Kumar Engineer School Education Dharamshaia Details of fixed assets Sr. Description of the asset Cost of the Addition Date of actual No. Assets during the use year 1 Furniture & Fixture 7700 36720 11.03.2012 2. Computers 32519 0
3. Cellular Phone 1600 4 Tool Kit 17863 Total 59682 36720 It is pertinent to mention here that the appellant has conveniently changed the head of the asset from office equipment shown at rupees 17863 in the original schedules attached to the annual accounts to Toolkit. This very clearly shows that the appellant is not disclosing the true facts of the case Opening Stock 2131896.71 1667638.86 Add: Purchase 43029367.58 20643761.58 Add: Cartage Inward 41720.00 20430.00 45202984.29 22331830.44 Less: Closing Stock 1830099.30 2131896.71 43372884.99 20199933.73 6.1.5 A perusal of the facts show that the appellant is having no person qualified as software professionals or hardware professionals or professionals with past experience to undertake the manufacturing as claimed by the appellant. The meager salary and the education qualifications raised serious suspicion about the qualifications required for discharging the job been undertaken by the appellant No machinery to undertake the manufacturing process or the testing process clearly leads to the inference that the appellant is carrying out no manufacturing as claimed by him. Moreover, as brought out by the assessing officer, the appellant is sing various items from vendors in New Delhi and is selling most of its s to its sister concern situated at New Delhi, the contention of the appellant that the goods were purchased from New Delhi, assembled in HP ani sold back in Delhi does not make much business sense.Page 17 of 23 ITA No. 377/Chd/2017
5.4 I find on a reading of the above in the light of the decisions relied upon by the assessee before the Bench that the reasoning and conclusion of the assessing officer upheld by the CIT(A) that the order of the CIT(A) on facts cannot be uphold. The decision of the coordinate Bench dated 09/08/2016 in ITA 248/CHD/2015 in the case of Indica software it is seen relied upon by the Revenue is wholly inapplicable. In the facts of the said case the coordinate Bench was considering the legitimacy of assessee's claim of having carried out production of software development. On a careful reading of the said decision it would be seen that the issue had been considered by the ITA T in the first round the claim of software development which necessarily required highly specialized man power for writing the software etc. was found to be absent whereas considering the production activity addressed in the facts of the present case is a hardware production not requiring any specialized technical knowledge of high order or multiple computer / laptops etc. as only a bare minimum software was required to be copied for making the assembled product functional. The coordinate Bench in the facts of the said case had directed a remand in the first round on account of the peculiar facts taken into consideration by the said Bench which have been referred to by the Co-
ordinate Bench in the second round which have been set out in para-2 of the aforesaid decisions and are self explicit. These are reproduced hereunder for ready reference:
The coordinate bench further held that the AO shall not review his decision relating to manufacturing of computer software whether falling within the ambit of industrial undertaking eligible for deduction u/s 80IB or not. Pursuant to the order of the coordinate bench the Id AO passed an assessment order u/s 144 of the Act rejecting the books of account stating the reasons about discrepancy in accounting of electricity bills, non availability of complete address of the parties to whom the sales of software is made, absence of any cost of purchase of software and on the competence of the employees of the assessee to develop the software. Subsequently, deduction u/s 80IA citing the incompetence of the staff/ employee of the assessee, for adequacy of the equipment of the equipments available in the form of computers etc, absence of complete details with respect to the development of the software, non availability of some of the employees for examination, absence of any expenditure on R&D activities, absence of any literature about the software, ignorance of the partners about the computer programming and host of other reasons led to such disallowance. The assessee carried the matter before the Id CIT (A) who in turn confirmed the finding of the Id AO for rejecting the claim of the assessee for deduction u/s 80IA of the Act. Aggrieved by the order of the Id CIT (A) the assessee is in appeal before us.
5.5 In the light of the said Remand the coordinate bench took note of the fact that the said assessee was a partnership firm formed by husband and wife wherein the husband derived income from salary and running business concern in the name of Chopra gas agency the wife was also deriving salary Page 18 of 23 ITA No. 377/Chd/2017 from some filling station. Both the partners on facts were not qualified as software professionals or had any past experience in the said business. The qualifications of the employees and their number also could not justifiably address the claim of software having been produced. The assets were noticed as incapable of being sufficient for software development activity as only one computer was noticed to have been available to the said firm. Accordingly it is seen that the said decision is entirely distinguishable on facts. In the facts of the present case the assessee has a partner namely Mr Sanjay Wadhwa who is a B Tech. Engineer and the staff employed was sufficient and capable of manufacture/produce the hardware by assembling; fitting; making functional;
casing; screwing; attaching wire testing packing etc. the separate and distanct products. There is no dispute that whereas for developing software a highly qualified trained technical manpower is required whereas for the activities of the assessee a rudimentary knowledge and after initial limited training only dext finger work is more than enough.
5.6. Before addressing the case law relied upon by the Ld. AR it is appropriate to also make a reference to the decision of the jurisdictional High Court in the case of ACIT versus Mrs Micro instruments company in ITA 958 of 2008 (0& M). The Ld. Sr. DR has drawn specific attention to para 11 of the said decision. For the proposition that it has been held therein that an assessee must fulfill each of the conditions stipulated in Section 80-IB in each of the years in which the deduction there under is sought. Relying on the said observation it was submitted that it has been held that the AO would be entitled to ascertain in each of the assessment years whether or not the conditions of Section 80-IB remained fulfilled. However on a reading of the said decision it is seen their Lordships have also very categorically held in para 12 of the said decision and cautioned the Revenue as under:
12. However, while undertaking this exercise, the AO is not entitled to reopen an issue that had been decided in respect of a previous assessment year. In other words, an AO is not entitled to question the validity of the grant of a deduction under section 80-IB in a pervious assessment year on any ground. The AO would not be entitled to say that a particular condition was not fulfilled in an earlier assessment year if the assessee had been granted the deduction in the assessment year in question before him on the ground that the assessee had failed to fulfill a condition precedent to the grant of a deduction in another assessment year. That would amount to an AO reopening an assessment in respect of another assessment year without following the provisions of the Act.Page 19 of 23 ITA No. 377/Chd/2017
5.7. Thus on a reading of the decision specifically para 11 in isolation would not serve any purpose as the issue of availability of deduction under section 80 IB to the said taxpayer which was being considered by the Hon'ble High Court on a challenge posed by the Revenue was ultimately decided in favour of the assessee by dismissing the departmental challenge. Infact at this juncture, it would not be out of place to extract the following words of wisdom pointed out by the Court in the case of Sun Engineering (cited supra):-
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision."
5.8. Accordingly I find that the reliance placed upon the said decision by the Revenue is misplaced. On the contrary, a perusal of the decision dated 3rd of August 2017 of the Apex Court in the case of CIT-V versus M/s Hindustan Petroleum Corporation in CA No. 9295 of 2017 which has been relied upon by the Ld. AR supports the case of the assessee. It is seen that in the facts of the said case the assessee respondent was engaged in the process of bottling liquefied petroleum gas cylinders meant for domestic use. Benefit under sections 80 HH, 80 I and 80 IA in the respective years was under consideration. In the facts of the said case, the Assessing Officer had disallowed the deduction claimed on the grounds that LPG was produced and manufactured in refineries and thereafter there was no change in the chemical composition or other properties of the gas in the activity of filling the cylinder. The said view had been affirmed by the CIT(A) and had been upset by the ITAT on the reasoning that the LPG produced in the refineries cannot be directly supplied to households without bottling of the LPG into the Cylinder and insofar as LPG bottling was concerned it was considered to be a complex activity which could be carried out only by experts. This was unsuccessfully challenged by the Revenue before the Hon'ble High Court which concurred with the view taken by the ITAT. The said decision was challenged in appeal further before the Apex Court and the Court apart from other reasons considering the earlier decision in ITO vs Arihant Tiles and Marbles [2010] 320 ITR 79 (SC) and after considering the process and considering the case law on the issue concluded that it was a manufacturing activity. When the said decision is considered in the light of the Page 20 of 23 ITA No. 377/Chd/2017 processes which have been discussed by the assessing officer itself in the assessment order and the individual products used for assembling; fitting programming; for the limited purposes of carrying out the functions of the said product; screwing; attaching wires; soldiering etc. transfer/copy software to make the product functional testing, labeling, packing etc. indelibly leads to the production of an entirely separate and distinct product from its original components. Accordingly, I find that the claim of the assessee has wrongly been disallowed. The decision is fortified by the various decisions cited before the Bench which have been referred to in the earlier part of this order specific mention may be made of CIT-V Mahesh Chander Sharma (2009) 308 ITR 0222 (P&H. A perusal of the said decision copy of which is placed at pages 33 to 37 of the Paper Book would show that in the facts of the said case the assessee was claiming deduction under section 80 IB for manufacture of motorcycle wheel which involved assembly of RIM; tube; tyre; bearing; drum; spoke; nipple and collar which on assembly resulted in an article of a distinct name and character. Considering the various case laws which were referred to by the parties before the Court the issue was decided by the Court as under:-
"11. Considered in this light, factually speaking in the instant case the various parts assembled by the assessee using its machinery results in achieving of a final product. The parts or components utilized by the assessee in its assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to 'manufacture' or production of an article. Therefore, the profit derived from each activity is eligible for the claim of benefit under s. 80-IA of the Act."
5.9. I further find that the decision mentioned at serial number 7 of the Apex Court also supports the view taken. We note that infact the decision of the jurisdictional High Court in the case of ACIT versus Micro-instruments company (2016) 97 CCH 0001PHHC of the jurisdictional High Court which had been relied upon by the Revenue has also been relied upon by the assessee. Specific para 8 of the said decision is reproduced hereunder:
18. We have carefully considered the rival submissions perused the order of assessment and material placed on record. The first and foremost issue that arises for our consideration in this appeal is in respect of disallowance of claim of deduction under s. 80-IA of the Act. The factual position which remains undisputed is that assessee has been manufacturing emergency light since inception i.e., 28th Oct., 1995 i.e., from financial year 1995-96 relevant to asst. yr.
1996-97. The assessee has claimed deduction under s. 80-IA of the Act both in asst. yrs. 1996-97 and 1997-98 of Rs. 16,95,358 and Rs. 62,42,673 respectively. The said claim of deduction stands duly accepted and allowed in intimation under s. 143(1) of the Act, which orders have also attained finality. It has been held in Saurashtra Cement & Chemical Industries Ltd. vs. CTT (1979) 11 CTR (Guj) 139 :
(1980) 123 ITR 669 (Guj) in the context of provisions of s. 80J of the Act that once Page 21 of 23 ITA No. 377/Chd/2017 relief had been granted in the initial year of assessment then he cannot examine the question again and decide the withdraw the relief, which has been already once granted without disturbing the relief granted in the initial year. Similar view has been expressed by Bombay High Court in the case of CIT vs. Paul Brothers (1995) 216 ITR 548 (Bom) and it was held that there is no provision for withdrawal of deduction for subsequent years unless and until it could be established that such deduction had been withdrawn in the initial assessment year. Applying the above to the facts of the instant case, we are firstly of the considered opinion that since industrial undertaking of the assessee has been accepted to be an eligible undertaking for the purposes of allowability of claim of deduction under s. 80-IA of the Act in the initial assessment year it remains an eligible undertaking even in the instant year, since the relief granted in the said year has not been disturbed and has acquired finality. Thus/, the undertaking of the assessee at Parwanoo is an eligible undertaking.
5.10. Reference may also be made to the order of the Chandigarh Bench in Shoghi Communications Ltd. vs DCIT (ITAT, Chandigarh) [2006] 25 CCH 0562 [CHD. Tribunal.] wherein the case of the revenue apart from other reasons also depended upon the fact that the employees were paid low salaries and also on the decision of the Apex court in the case of CIT-V versus Oracle software India Ltd (2010 320 ITR 0546 wherein the duplicacy process was considered to have changed the basic character of a blank CD which thus became dedicated to a specific use. In the facts of the present case the specific steps processes have been identified the employees are available a partner of the assessee firm having a technical qualification is available on record the product being manufacture/produce admittedly does not use heavy electricity or heavy machinery similarly does not require highly literate, technically qualified staff the fact that the individual parts on going through the process of manufacture result in production of products which are separate and distinct from the sum total of the purchaseD parts which are identified as separate products in the market having separate and distinct identity from its individual parts. I find that the claim has been rejected on suspicious and surmises ignoring the facts on record and on an incorrect appreciation of law for the reasons set out herein above at length. Accordingly for the reasons set out herein above the claim of the assessee is allowed.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 24th January 2018.
Sd/-
(DIVA SINGH) JUDICIAL MEMBER Dated : 24 t h Jan. 2018 AG/Amit Kumar Page 22 of 23 ITA No. 377/Chd/2017 Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR Page 23 of 23