Income Tax Appellate Tribunal - Ahmedabad
Avinashi Industries, Ahmedabad vs Department Of Income Tax on 4 October, 2013
1 ITA Nos. 2430/A/2010 & 2309/A/2012
. A.Y. 2007-08 & 2009-10
IN THE INCOME TAX APPELLATE TRIBUNAL " A " BENCH, AHMEDABAD
(BEFORE SHRI D.K. TYAGI, J.M. & SHRI ANIL CHATURVEDI, A.M.)
I.T. A. Nos. 2430/AHD/2010 & 2309/AHD/2012
(Assessment Year: 2007-08 & 2009-10)
ACIT. Circle-7, Ahmedabad V/S M/s. Avinashi Industries,
L/5/5/124, Shastrinagar,
Anku-Ranapark Road,
Naranpura, Ahmedabad-
380013
(Appellant) (Respondent)
PAN: AAMFA6930F
Appellant by : Shri O.P. Batheja, Sr. D.R.
Respondent by : Shri Mukesh M. Patel A.R.
आदे श)/ORDER
(आदे Date of hearing : 04-10-2013 Date of Pronouncement : 03 -12-2013 PER SHRI ANIL CHATURVEDI,A.M.
1. These two appeals are filed by the Revenue against the order of CIT(A)-
XIV, Ahmedabad dated 10.05.2010 & 08.08.2012 for A.Ys. 2007-08 & 2009-10 respectively.
2. Before us, both the parties submitted that issue in both the appeals are with respect to deduction u/s 80 1C and are similar except for the amounts and therefore the submissions made by them while arguing the appeal in one year would be equally applicable to the other. We therefore 2 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 proceed to decide both the appeals together by a consolidated order for the sake of convenience and thus proceed with the facts for AY 2007-08.
3. The relevant facts with respect to present case as culled out from the material on record are as under:-
4. Assessee is a firm engaged in the business of manufacturing of reactive dyes in notified industrial area in the state of Sikkim. Assessee electronically filed its return of income for AY 2007-08 on 21.10.2007 declaring total income of Rs Nil after claiming deduction of Rs 3,03,68,280/- u/s 80IC. The case was selected for scrutiny and thereafter the assessment was finalised u/s 143(3) vide order dated 31.12.2009 and the total income was assessed at Rs 3,03,68,280/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) vide order dated 10.5.2010 allowed the appeal of the Assessee. Aggrieved by the aforesaid order of CIT(A), the Revenue is now in appeal before us and has raised the following effective ground:-
1. The ld. Commissioner of Income-tax(A)-XI, Ahmedabad has erred in law and on facts in deleting the disallowance made of Rs. 3,03,68,280/- claimed as deduction u/s.
80IC.
5. Assessee is a partnership firm constituted during the assessment year under review and has stated to have begun to manufacture of reactive dyes and chemicals at its unit located at village Manpur, Sikkim, a notified industrial area, in Sept 2006. During the course of assessment proceedings AO noticed that the entire net profit of Rs 3,03,68,283/- earned by the Assessee was claimed as exempt u/s 80IC of the Act. The 3 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 Assessee was asked to furnish various details and justify its claim of deduction. On perusing the details, AO noticed that Assessee had achieved a huge turnover of Rs 4.31 crore within a very short time of two and half months and the turnover was out of the production of two machineries (known as Ball Mills) which was used for mixing and grinding of materials. He also noticed that the Assessee had shown G.P of 71.38% and N.P. of 70.42% which according to him was not possible in normal course of business. To understand the manufacturing process and to undertake spot inquiry of the factory premises,, AO requested DIT Investigation, Kolkatta to conduct spot inquiry of the factory premises at Khasara Manpur. AO in the order has noted that DIT, (Investigation) in its report has interalia submitted that on the day of visit, the factory was not in running situation though it was not a official holiday, the factory was managed by only one person, there was no raw material or finished products or machineries except two Ball Mills which were also rusted from inside, only 5 bags of common salt and some empty paper board cartoons which may be used for packing of goods were found. On the basis of report and on the basis of submissions of Assessee with respect to the manufacturing process of the Assessee, AO noted that Assessee purchases various dyes in crude form. Thereafter, blending process is carried out by mixing crude dyes in MS Ball Mill with adhesive/binder material. Based on the desired shade and texture of the reactive dye required, Glauber Salt (Sodium Sulphate) or Sea Salt (Nacl) are added in requisite proportion. The ball mill is rotated to ensure complete mixing and grinding of the constituents. After sieving, the finished products are ready to be packed in corrugated boxes for dispatch. He also noticed that the Assessee purchases and sells both reactive dyes. On the basis of 4 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 production and consumption of the raw materials furnished by the Assessee, AO noted that in the production process there is no wastage nor any by-products were generated. He also noted that the entire chemical process did not reflect any energy loss or energy generation which is always there in chemical reaction. AO therefore concluded that the activities done at Manpur factory was nothing but Assessee simply processes the reactive dyes by mixing some amount of Sodium Chloride and Sodium Sulphate with the purchased reactive dyes. He further noted that even after blending or mixing of reactive dyes with different salts, the reactive dyes remain reactive dyes and accordingly it did not amount to manufacture or production of article or thing. AO further noticed that the entire sales of Rs 4.21 crores were made to 2 sister concerns namely Gujarat Dyes and Chemicals and M/s Colourstar Dyes and Chemicals situated at Tirupur, Tamilnadu. He thus after considering all the aforesaid factors concluded that the claim of Assessee of manufacturing and claim of deduction u/s 80IC was a colourable devise and accordingly disallowed the claim of the Assessee. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the Assessee, allowed the claim of the Assessee by holding as under:-
3. As seen from the assessment order, the A.O. made various observations based on which the appellant was held to be not entitled to deduction u/s. 80 1C. Primary reason for holding so appears to be that the appellant is not engaged in manufacture or production of an article or thing. The appellant is engaged in the activity of blending and mixing (with the help of two ball mills) different Reactive dyes numbering more than 60. The A.O. observed that as seen from the certificate issued by the State Pollution Control Board the appellant was granted permission to operate a unit for blending of reactive dyes at Manpur, Sikim. The A.O. held that such an activity does not amount to manufacture.
The appellant has not disputed that they are engaged in the activity of only mixing and blending reactive dyes. It is contended by the Ld. A.R., that vide para 8 of chapter 32 of the Central Excise Tariff of India, conversion of unformulated, unstandardised or unprepared forms of synthetic organic dyes by addition of dispersing agents or diluents amounts to manufacture. The 'Central excise Registration certificate' dated. 30/08/06 categorically stated that the appellant was registered for 'manufacturing of excisable goods' . It was further contended that Central Excise duty deposit of Rs. 17.39 lakhs was actually paid by the appellant and necessary details were furnished to the A.O. Once 5 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 the Central Excise department has accepted the activity of the appellant to be one of manufacture A.O. was not justified to treat the activity as not one of manufacture. In support thereof he relied on the Apex Court decision in the case of ITO v/s. M/s. Arihant Tiles & Marbles (P) Ltd. (320 ITR 79) Further reliance was placed on the decision of the Supreme Court in the case of India Cine Agencies v/s. CIT 308 ITR 98 (SC) and it was argued that the finished product in the appellant's case is a new and distinct commodity, quite different and independent of the raw materials. The Ld. A.R. also analyzed the activity of the appellant in terms of definition of manufacture inserted by sub section (29BA) of section 2 which is effective from 1.4.2009. It is contended that though the said definition is not operative for the assessment year under consideration, the activity of the appellant satisfies the said definition of manufacture. Further reliance was also placed on the decision of Authority for Advance Rulings (AAR) rendered in the case of Ramit Kumar Sharma (309 ITR 344). 3.1 As seen from the certificate dated 17/3/09 issued by the State Pollution Control Board, the government of Sikkim, the appellant was permitted to operate a unit for blending of Reactive Dyes. The appellant accepted that they are engaged in only mixing, grinding and blending of Reactive Dyes. In view of the Central Excise Tariff of India such an activity constitutes manufacture. The appellant deposited an amount of Rs. 17.39 lakhs with the Central Excise department, though the appellant is exempted from payment of Central Excise duty. The Central Excise duty deposited is to be refunded by the department on the winding up of business. The said amount is not debited to the trading account but is shown as an asset in the balance sheet. In view of the Supreme Court decision in the case of M/s. Arihant Tiles & Marbles (P) Ltd. (320 ITR 79), once an activity is taken to be manufacture for the purpose of Central Excise, it has to be accepted to be so for the purpose of Income tax also. Further to qualify for the deduction u/s. 80 1C, the activity need not be one of manufacture alone. Even production of an article or thing qualifies for the deduction. As held by the Supreme Court, the word production encompasses a larger area than manufacture. The assessment order is silent on the aspect as to why the activity of the appellant cannot be taken to be one of production (presuming that it does not constitute manufacture). Keeping in view the Supreme Court decision cited at 320 ITR 79 (supra) and in the case of India Cine Agencies v/s. CIT 308 ITR 98 (SC) and the decision of Authority for Advance Rulings (AAR) rendered in the case of Ramit Kumar Sharma (309 ITR 344), I am of the considered view that the activity of the appellant will be one of manufacture or production and accordingly qualifies for deduction u/s. 801C.
4. Another important consideration for the disallowance of the claim by the A.O was that most of the sales were made by the appellant to its sister concern namely M/s. Colourstar Dyes & Chemicals at a rate which is much higher than the market rate. As seen from para 7 of the assessment order, A.O came to the conclusion that the arrangement between the appellant and its sister concern was of the nature referred to u/s. 80 IA(10) and that only net profit @ 6.89% can be considered to be eligible for deduction u/s. 80 1C and the balance is to be taxed as normal business income. However, the A.O went on to disallow the entire claim and the finding regarding applicability of section 80 IA(10) remained an alternate finding.
4.1 At this juncture, it is worthwhile to consider the statutory provisions on the issue. Sub section 7 to section 80 1C is reproduced below:-
"The provisions contained in sub-section (5) and sub sections (7) to (12) of section 80 IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section. "
The provisions of section 80IA(10) read as under:-
" Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, of for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom ".
4.2 In this regard the Ld. A.R contended that the high margin of G.P @ 71.38% and N.P @ 70.42% is attributable to the appellant being exempt from levy of Central Excise and VAT/CST which improves the profit margin by 21.14% ; sale consideration is higher in view of the longer period of credit of around 6 months allowed to the purchaser which results in increase in profit margin by around 5%; savings on account of there being no intermediariary between the appellant and the retailer, which results in increase in profit margin of around 25 to 30%; savings on account of transportation cost of 6 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 materials sold by the appellant, which is borne by the purchaser; and economy in administrative expenses resulting in better profits. It is contended that these factors justify the G.P. @ 71.38% earned by the appellant. Besides, the Ld. AR furnished the trading results of the sister concern M/s. Colourstar Dyes & Chemicals. As seen from the details furnished, the G.P. of the sister concern in the assessment year 2006-07 (the appellant firm was not in existence in this year) was @ 4.80%. As against this in the year under consideration i.e. A.Y. 2007-08 its G.P. was 4.85 % and in the A.Y. 2008-09 it was 4.83%. Thus it is contended by the Ld. A.R. that the gross profit remaining consistent for 3 years, the A.O's finding that the sister concern made purchases from the appellant at inflated prices does not stand to reason. It is further contended that the market price of any commodity depends on the quality of the product and since the appellant's product was of superior quality higher consideration was paid for the same. The very fact that the sister concern's G.P. has not gone down goes to prove that the sister concern in turn was able to sell the product at profit.
4.3 I have considered the observations of the A.O and the submissions of the appellant. The very fact that the G.P. of the sister concern remained consistent over the 3 assessment years, i.e., 2006-07, 2007-08 and 2008-09 belies the finding of the A.O that there was any arrangement between the appellant and the sister concern resulting in producing inflated profits to the appellant. Various reasons given by the appellant for earning the G.P @ 71.38 % and N.P. @ 70.42% are tenable. It is not proper to compare the profits of the appellant with the profits of units at Ahmedabad (which do not enjoy the tax concessions enjoyed by the appellant for having established the unit in notified area.). In this regard it is seen that in the case of ITO v/s. Novel Consumer Products Pvt. Ltd. 7 SOT 615(Mumbai) it was held that " in the absence of any efforts by the A.O to ascertain the exact profit rate from comparable cases, sub s.(10) of S.80-IA was wrongly applied, explanation of the assessee being plausible". Further in the case of Addl. CIT vs. Delhi Press Patra Prakashan 103 TTJ 578 (Del) it was held that "deduction u/s.80IA could not be reduced by A.O by recourse to sub-s.(10) thereof merely because the profit rate of eligible unit was substantially higher than overall rate of profit of other units of assessee, moreso when separate books were maintained by assessee in respect of its eligible unit and no defects were found by A.O. in the books." . Keeping in the view material on record and in the light of the above case-laws, I hold that appellant cannot be said to have entered into any "arrangement" as envisaged under the provisions of section 80IA(10). 4.4. As regards, the other observations made by the A.O., A.O's observations and appellant's contentions are reproduced at page 13 and page 14 of the order. Having considered the same I am inclined to accept the contentions of the appellant and I am of the view that no adverse view can be taken.
4.5 Accordingly, I hold that the disallowance of deduction u/s. 80IC is not warranted. It is deleted. These grounds of appeal are allowed.
6. Aggrieved by the order of CIT(A), the Revenue is now in appeal before us.
7. Before us Ld. D.R. pointed to the findings of AO and submitted that Assessee has achieved a huge turnover in a very short period of two and half months. The Ld.D.R. further submitted that the activities done by the Assessee at Manpur factory was nothing but simply processing of reactive dyes by mixing some amount of Sodium Chloride and Sodium Sulphate with the purchased reactive dyes which was also been proved 7 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 by statement recorded of the purchase parties. He further submitted that Assessee has not brought on record as to whether any chemical reaction takes place in the manufacturing process. He further submitted that the activity of blending of different types of reactive dyes does not results into production of a commodity having different chemical characteristics and therefore the activity cannot be considered as manufacturing activity. According to the Ld.D.R. the activity done by the assessee cannot be termed as a manufacturing activity so as to be eligible for deduction u/s 80IC. The Ld. D.R. further pointed out that the Gross profit shown by the Assessee was in excess of 70% of turnover which cannot be considered to be a normal profit. The Ld. D.R. also placed reliance on the decisions in the case CIT vs Tara Agencies (2007) 292 ITR 444 (SC), CIT vs Premier General Traders (P) Ltd (2000) 242 ITR 654 (Bom), Lucky Minmat (P) Ltd Vs CIT (2000) 245 ITR 830 (SC), Pravan Air Products (P) Ltd Vs JCIT (2012) 24 taxman.com 19 (Ahd) and other decisions. He thus strongly supported the order of AO.
8. On the other hand the Ld. A.R. reiterated the submissions made before AO and CIT(A) and further submitted that the Assessee is engaged in the manufacture of reactive dyes. The manufacturing process as carried out by the Assessee was that various crude raw materials which are in powder form are purchased on which diluent process is carried out by mixing crude dyes in the MS Ball Mill with Sodium Sulphate or Sodium Chloride which act as dispersing agents. Wherever required, Anti-dusting Oil is also used as a binding agent. The Ball Mill is rotated to ensure complete mixing and grinding of the constituents and attain the desired texture. After sieving, the finished product is ready to be packed in 8 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 corrugated boxes for despatch. The end product produced is sold as distinct reactive dye. Ld. A.R. further submitted that the activity of the Assessee has been classified as being in the nature of "manufacturing" by the Excise Authorities and is covered by Chapter 32 of the Central Excise Tariff. He further submitted that as per the provisions of 32 of Central Excise Tariff, conversion of unstandardised synthetic organic dyes by addition of dispersing agents or diluents into standardised forms ready for use in the process of dyeing amounts to "manufacture". He further submitted that the process of manufacture under the provisions of Central Excise Tariff squarely falls within the meaning of the term "manufacture or production of any article or thing" u/s 80IC. He further submitted that once the activity of Assessee has been considered to be manufacturing activity by one wing of the Government Department, namely Excise Authorities, it would not be proper for the Income tax Department to treat the same activity as not a manufacturing activity. For this proposition he relied on the decision of Apex Court in the case of ITO Vs Arihant Tiles and Marbles (P) Ltd (2010) 320 ITR 79.
9. With respect to justification of higher margin of profit earned by the Assessee, the ld. A.R. submitted that it was due to various factors namely, the Assessee was enjoying exemption levy of Central Excise (being 16.48%) and VAT/CST (effective rate being 4.66%) and thus the additional profit margin was around 21.14%, allowing longer credit period of around 6 months instead of normal credit period of 60 to 90 days and therefore to cover the notional cost of finance extra price was charged which translated to around 5%, Assessee was selling directly to the retailer and thus avoiding the middlemen and other intermediates 9 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 which resulted into saving of around 25 to 30%, the transportation cost was borne by the retailer which also resulted into saving to the Assessee. It was further submitted that the Assessee operated on a low profile and thus maintained administrative and running expenses economically which also translated into higher margins.
10. With respect to the report of the Inspector which was heavily relied by the AO, Ld A.R. submitted that the last batch of production was taken in the end of Nov 2009 and the last dispatch of finished product was made on 30.11.2009 i.e. about 3 weeks prior to the visit of the IT Inspector and therefore the conclusion of the Inspector that no activity seems to be done at the factory premises since a long period was misplaced. The Ld. A.R. further submitted that on account of the chemical corrosion, the paint on the machine peeled off which does not mean that the machinery was laying in rusted condition. The Ld A.R. further submitted that the no statement of the Manager at the factory was recorded and if recorded, no copy of the same was made available to the Assessee which therefore was also against the principles of natural justice. He further placed reliance on the decision of Apex Court in the case of, Indian Cine Agencies vs CIT 308 ITR 98 (SC), CIT Vs Prabhudas Kishordas Tobacco Products (P) Ltd (2006) 282 ITR 568 (Guj), ITO vs Natural Fragrances (2012) 27 Taxmann.com 292 (Del)and Aquamall Water Solutions (P) Ltd Vs CIT (2013) 36 Taxmann.com 399 (Hyd). He further submitted that CIT(A) after considering the factual and legal position rightly held that the Assessee is entitled to deduction u/s 80IC. He also submitted that the decisions relied upon by Revenue are distinguishable 10 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 on facts and therefore have no application to the present case. He thus supported the order of CIT(A).
11. We have heard the rival submissions and perused the material on record.
It is an undisputed fact that the Assessee firm was formed in the year under consideration and had undertaken the activity of blending and mixing different reactive dyes with the help of two ball mills at its unit located in Sikkim and the profits generated out of the sale of such products manufactured at its unit at Sikkim, was claimed as deduction u/s 80IC. The main dispute in the present case is whether the activity of blending and mixing of reactive dyes can be considered to be manufacturing or production so as to entitle the Assessee to deduction as per the provisions of u/s 80IC? As per the Assessee, the activity undertaken by the Assessee has been classified as being in the nature of "manufacturing" by Excise Authorities and as per provisions of 32 of Central Excise tariff, conversion of unstandarised synthetic organic dyes by addition of dispersing agents or dilutents into standardised forms ready for use in the process of dyeing amounts to "manufacture". On the other hand as per the Revenue, the activity of assessee is grinding and mixing of different reactive dyes with different salts and there is no material on record to show that the new commodity that comes into existence has different chemical properties and after the manufacturing process, the final product is substantially different from that of the original ingredients. Before us, the Ld.A.R has submitted that once the activity of assessee is considered to be a manufacturing activity by the Excise authority, it would be incorrect on the part of Income tax to consider the activity as not manufacturing and thus take a different view.
11 ITA Nos. 2430/A/2010 & 2309/A/2012. A.Y. 2007-08 & 2009-10
12. We find that section 2(29BA) was inserted by Finance (No 2) Act, 2009 with effect from 1.4.2009 which defines manufacture as under:-
"manufacture" with its grammatical variations, means a change in a non living physical object or article or thing -
(a) Resulting into transformation of the object or article or thing into a new and distinct 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 structures"
13. In the present case, though the assessment year involved is 2007-08. We are of the view that the definition of "manufacture" as defined in s. 2(29BA) though not applicable but certainly can be used as a guide. As per clause (b) of section 2 (29BA) the definition of "manufacture" means "bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure". Before us, nothing has been brought on record to demonstrate that the chemical composition of the raw materials used by Assessee has undergone a change or there is a substantial change in the chemical composition or integral structure of the raw materials so as to form a new product and that the chemical composition of the finished product is different from that of the original raw material. As per the Assessee the nature of activity done by the Assessee at its unit is termed as" manufacture" by Excise Authorities. We are of the view that though under the Income tax Act there is nothing to suggest that if a particular process is considered as manufacturing process under the Excise Regulations the same has to be treated as Manufacturing for the purposes of Income tax also. We are of the view that for the purpose of income tax it needs to be found out as to 12 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 whether the process undertaken by an Assessee meets the test of manufacturing so as to become eligible for deduction for undertaking the manufacturing activity. For our aforesaid view we also get support from the decision of co-ordinate Bench in the case of Nemat Enterprises (P) Ltd vs ACIT (ITA No 7423 (Mum) of 2010 order dated 23.10.2010) where at para 6.4, the co-ordinate Bench of Tribunal has noted as under:-
"...Merely because for the purpose of excise duty Attar has been placed in a separate Chapter it cannot be concluded that Attars is different from the original constituents particularly when the assessee is not paying any excise duty on the product. It is possible that Central Excise Tariff Act (CETA) deems certain processes as manufacturing by placing certain products in a particular chapter for the purpose of excise duty even if they do not fulfil strict criteria of a manufacturing process but for the purpose of Income-tax we have to find out whether the product meets the test of manufacturing activity particularly in a case like this in which the assessee is not even paying excise duty..."
14. We also find that in the case of Aartech Solonics Ltd, vs. CIT (2013) 256 CTR (MP) 293, the issue before the H'ble High Court was whether the manufacturing of Advanced Microprocessor based Fast Bus Transfer Scheme Panel was a manufacturing process or assembling process? The Hon. High Court has observed as under:-
"5.It appears that both authorities have not considered the process for manufacture of the product. The CIT (Appeal) had considered the matter in a different aspect while the Tribunal had looked into the expenditure aspect and also in respect of the employment of certain persons. The Tribunal was of the opinion that without assistance of the technical persons, no such product could have been manufactured, while finding of the CIT (Appeal) was based entirely on a different footing but the fact remains that none of the authorities had considered how product namely Fast Bus Transfer Scheme Panel is manufactured or assembled. Until and unless some technical expert person examines this aspect, the nature of the product cannot be ascertained whether this is a manufacturing process or is an assembling process. The Apex Court in Oracle Software India Ltd. (supra) considering similar questions held that in each case when an issue of this nature arises for determination, the Department has to study the actual process undertaken by the assessee. If an operation/process rendered a commodity fit for use for which it would otherwise not be fit, the operation/process fell within the meaning of the word "manufacture". Therefore, in each case, where a issue of this nature arises for determination, the department should study the actual process undertaken by the assessee. In Emptee 13 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 Poly-Yarn P. Ltd (supra), the Apex Court considering the similar issue held that repeatedly the Apex Court have recommended to the Department, be it under Excise Act, Customs Act or the Income-tax Act, to examine the process applicable to the product in question and not to go only by dictionary meanings. This recommendation is not being followed over the years. Even when the assessee gives an opinion on a given process, the Department does not submit any counter opinion wherever such counter opinion is possible. The Apex Court considering the issue in Morinda Co-operative Sugar Mills Ltd. (supra) reiterated the law, held in para 9 thus:-
"This Court has repeatedly told the Department that, in all such cases, they should have a panel of experts who may be engaged in appropriate cases so that the cases need not be remitted. We do not express any opinion on the merits of the case. We give liberty to the advocates on both sides to cite appropriate judgments of this Court which have laid down the test as to when an operation becomes 'manufacture'. We have laid down the test in one of the cases, namely, Oracle Software India Ltd., (supra),"
6. In the light of the aforesaid judgments, if we look into factual aspects in the present matter, we find that as per case of the appellant, it was a hyper technical process of manufacturing which was placed before the CIT (Appeal). The CIT (Appeal) in para 3.3 of the order referred the process for manufacturing but had not evaluated/got examined aforesaid process through a technical person. Before it, when the matter was before the Assessing Officer, such process was not followed. Even before the Tribunal, though such issue was raised but the Tribunal had considered the matter in a different perspective and turned down the case of the assessee merely on the grounds that there was no adequate expenditure in the process of manufacturing of the aforesaid product and the persons who were employed were not technical. The Tribunal had only considered that on perusal of the receipts, the expenditure was very low and the profit was high. On these grounds, the order of CIT (Appeal) was turned down by the Tribunal. In our considered opinion, in view of the law laid down by the Apex Court in aforesaid three judgments, we find it appropriate that the matter ought to have been examined by the Assessing Officer through the assistance of technical person or a committee of technical persons, if available in the department, but it appears that such process was not followed and the product of the appellant was not found to be manufactured. Though the CIT (Appeal) had found that it was a manufacturing process, but the Tribunal has turned it down. In view of aforesaid, we find it appropriate to remand the matter to the Assessing Officer to call an opinion of the expert in the subject or if panel of experts is available in the department, to take assistance of such panel and after getting an opinion of the experts, to decide that the product namely "Microprocessor based Fast Bus Transfer Scheme Panel" is a product by manufacturing or only an assembled item and thereafter, to decide the matter in accordance with law."
14 ITA Nos. 2430/A/2010 & 2309/A/2012. A.Y. 2007-08 & 2009-10
15. In the present case we find that CIT(A) has not obtained any report from an expert to conclude that the new product which has come into existence by undertaking the process of mixing and grinding is on account of manufacturing process but has accepted the contention of Assessee. Considering the aforesaid facts and relying on the decisions cited hereinabove, we are of the view that a definite finding is required to determine as to whether the activity of the assessee can be termed as manufacture in the light of the requirement of the Act so as to enable the Assessee to claim deduction u/s. 80IC. We are therefore of the view, that to meet the ends of justice, the above mentioned aspects needs to examined once again by CIT(A) in the light of the decisions cited above. We are further of the view that for deciding the issue as to whether due to the activity done by the Assessee, any change in chemical composition etc has taken place, CIT(A) may obtain an expert opinion on the composition of the raw material and its transformation into finished goods.
16. We find that the Assessee has submitted the reason for having gross profit in excess of 70% to be on account of saving in excise duty, VAT, higher price charged on account of longer credit period and lower administrative cost. We find that there is no finding on the aforesaid aspect by CIT(A) and he has accepted the contention of Assessee. Since the matter is remitted to the file of CIT(A), he shall also examine these aspects and after recording a definite finding decide the issue, in the light of the decisions cited herein above and thereafter decide the issue. Needless to state, that he shall grant adequate opportunity of hearing to both the parties. We are further of the view that the decisions relied upon 15 ITA Nos. 2430/A/2010 & 2309/A/2012 . A.Y. 2007-08 & 2009-10 by Assessee are distinguishable on facts. In the result, this ground of Revenue is allowed for statistical purposes.
17. Since it is admitted by both the parties that the facts of the case of A.Y. 07-08 are similar to that of A.Y. 2009-10, we for the reasons given while deciding appeal of A.Y. 07-08 also allow the ground of Revenue for A.Y. 2009-10 for statistical purposes
18. In the result the appeal of the Revenue is allowed for statistical purposes.
Order pronounced in Open Court on 03 -12 - 2013.
Sd/- Sd/-
(D.K. TYAGI) (ANIL CHATURVEDI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad. TRUE COPY
Rajesh
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals) -
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad