Income Tax Appellate Tribunal - Chennai
Gemini Communicaion Ltd., Chennai vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, CHENNAI
(BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND
SHRI S.S. GODARA, JUDICIAL MEMBER )
.....
I.T.A. No. 1619/Mds/2012
Assessment Year : 2006-07
The ACIT, M/s.Gemini Communication
Company Circle II(2), v. Ltd.,
Room No.512,Fifth floor, No.1,Dr.Ranga Road,
New Block, 121, Mahatma Alwarpet, Chennai 600 018.
Gandhi Road, Chennai.
(Respondent)
PAN : AAACG 2531 K
(Appellant)
C.O. No. 164/Mds/2012
Assessment Year : 2006-07
M/s.Gemini Communication The ACIT,
Ltd., v. Company Circle II(2),
No.1,Dr.Ranga Road, Room No.512,Fifth floor,
Alwarpet, Chennai 600 018. New Block, 121, Mahatma
Gandhi Road, Chennai.
PAN : AAACG 2531 K
(Cross Objector) (Appellant in Appeal)
2 M/s.Gemini Communication Ltd
Assessee by : Shri M.Narayanan, Retd. ACIT
Shri G.Moorthi, Advocate
Revenue by : Shri S.Jayaraman, CIT
Date of Hearing : 08 .11.12
Date of Pronouncement : 09 .11.12
O R D E R
PER N.S.SAINI, ACCOUNTANT MEMBER:
This is an appeal filed by Revenue and Cross objection by the Assessee against the order of CIT(A)-III, Chennai dated 04.05.2012.
2. The Revenue has taken the following grounds:-
1. The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) has erred in deleting the withdrawal of deduction u/s.
80IC to the extent of ` 8.84 crores;
2.1 The learned CIT(A) ought to have noticed that the assessee is only doing assembling work and not manufacture as stipulated in Sec.80IC of the Act.
2.2 . It is submitted that the decisions of the Apex Court in the case of Union of India Vs. Delhi Cloth & General Mills Co. Ltd. (AIR1963SC791), Indian Hotels Co. Ltd. Vs. ITO (245 ITR 538) and Prabhat Sound Studios Vs. Addl CCE (107 STC 70) clearly stipulates manufacturing is a process or series of processes by which a new end product is produced from the raw material and which is altogether a different commodity in its physical and chemical form.
2.3 The learned CIT(A) ought to have appreciated the fact that the assessee was only doing assembling work of RFID readers which are net work 3 M/s.Gemini Communication Ltd equipments forming part of information and communication technology industry at Parwanoo Unit, Himachal Pradesh.
2.4 The learned CIT(A) ought to have appreciated the fact that the assessee had set up a manufacturing unit at Parwanoo Unit in the State of Himachal Pradesh. However, the assessee did not furnish list of employees in parwanoo unit, details of electricity charges, rental agreement with the landlord, delivery challans, shipping address and evidences for stock transfer.
2.5 The learned CIT(A) ought to have appreciated the fact that the bills and invoices of certain items like CDs and Floppy disc of Mosearbear, Sony etc. showed that the assessee was carrying on trading activities. 2.6 The learned CIT(A) ought to have allocated the expenditure at the rate of 50% between the two units at Chennai and Himachal Pradesh Units as seen from the consolidated profit and loss account furnished by the assessee.
2.7 The CIT(Appeals) in para 6.10 and 6.17 of the order had apportioned a portion of expenditure to the Parwanoo Unit which proves that the quantum of production / sales to that of the infrastructure facilities for producing such quantity were not available in Parwanoo Unit and assessee was not fully engaged in manufacturing activity and major activity of marketing and sales were done at Parwanoo Unit;
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be restored."
4. Ld. D.R. submitted that the sole issue involved in the Revenue's appeal was that the CIT(A) erred in deleting the withdrawal of deduction under section.80-IC of Rs.8.84 crores.
5. Brief facts of the case are that the assessee claimed deduction under section 80-IC of the profits derived from its manufacturing unit situated at Himachal Pradesh. For the year under consideration, the 4 M/s.Gemini Communication Ltd unit was located at MIG-IV, Parwanoo, H.P. A.O. noticed that the assessee was only doing assembling work and not manufacturing.
The assessee was only importing PCBs and other components and assembling it at its factory. This 'assembling' will not come under the head 'manufacture or production'. Under section 80-IC, an enterprise which has begun or begins to manufacture or produce any article or thing is only eligible for deduction under section 80-IC.
Further, assessee was asked to furnish the details regarding the employees who were employed in its Parwanoo unit and prove that more than 70% of the total manpower was from Himachal Pradesh.
The Assessee submitted list of 10 employees who were deputed to H.P. from the head office. According to A.O., no details regarding the other employees were submitted. A.O. further noticed that no documents were produced to prove that sufficient employees were employed to achieve turnover of Rs.52 crores. The A.O also observed that the fact that the assessee had employed only 10 employees with a salary of Rs.14.59 lakhs as compared to the total salary of Rs.291.03 lakhs for the othe units created a doubt as to whether any manufacturing activity was carried out in the Parwanoo 5 M/s.Gemini Communication Ltd unit. The A.O. also observed that the assessee had spent only a sum of Rs.79,000/- towards electricity for achieving a turnover of Rs.52 crores. The reason as to why the electricity charges were so low was also not satisfactorily explained. The Assessing Officer also noted that the proof for delivery of sale items and purchase items along with the relevant documents were not produced inspite of giving enough opportunity to the assessee. Further, the Assessing Officer observed that based on the purchase and sales invoice produced by assessee it was clear that the assessee was carrying out only a trading activity.
It was also stated that the assessee could not produce any excise/VAT etc. for its Parwanoo unit nor could it produce the permanent registration certificate . The A.O. further observed that the reasons for huge differences between purchases and sales and the absence of any closing stock in the Parwanoo unit were not satisfactorily explained by the assessee. It was further observed that in the Directors' report there was no mention about the establishment of the new unit at Parwanoo. The assessee was also not able to produce evidence for the transport of good from Parwanoo unit to its customers. In view of these facts, A.O held that the unit is only a 6 M/s.Gemini Communication Ltd branch and not a manufacturing unit eligible for a deduction under section.80-IC.
6. The Ld. A.R. argued before the CIT(A) against the disallowance of deduction u/s 80IC. A.R. had filed detailed written submission and various supporting documents and argued that the appellant had fulfilled all conditions required for deduction u/s 80-IC.
He stated that the A.O. had rejected the submission and explanation of the appellant without considering the merit of the case and without appreciating the evidences produced before him. The A.O had followed the earlier reasoning of his predecessor and the directions of the Addl.CIT u/s 144A while passing the original order. The relevant part of the submission of the Id.AR is reproduced hereunder:
Brief history of the Himachal Pradesh manufacturing unit:-
Up to 2004 the appellant did various small & medium level networking projects to Government and Others. From the year 2005 onwards, the project size becomes more than 100 crore mainly from state and central government enterprises. To do these projects successfully with competitive price and by availing tax exemption, the appellant started its own manufacturing unit at the tax exempted industrial area in the state of Himachal Pradesh.
7 M/s.Gemini Communication Ltd With the Guidance of the Himachal Pradesh State Industrial Development Corporation, the appellant company commenced its manufacturing. For this, the appellant passed through various stages as follows:-
a). On 22.8.2005 after submission of caution deposit receipt, the company got provisional registration from HPSIDC, and registered with CST, HPGST authorities. After this started its commercial production at MIG-4, SEC-3 Parvanoo Dist Solan (H.P) and started production - (Annexure - page 1-4) For This the Annual Sales Tax Return filed with the above HPGST authorities (Annexure -
5)
b). On 20.12.2005 the HPSIDC allotted 500 Sq.Mts. of land at Plot No 18 -Ext. Industrial area, Baddi to the appellant - (Annexure - page 6-13)
c). On 18.01.2006, HPSIDC handed over the land and on 9.6.2006 they have been given plan approval for constructing their own factory. Then the appellant built the factory for manufacturing their products in their own unit- (Annexure - page 14-15)
d). On 21.01.2007 appellant received power release certificate for its own factory and after proper inspection and testing conducted by the officials of HPSIDC, from 30.7.2008 onwards they had started production at their own factory unit at Plot. No. 18 Extn., Industrial Area, Baddi (HP) (Annexure - page 16-17)
e). After having commenced production at their own place the appellant have been given original permanent registration along with entrepreneurs memorandum confirming no of employees and got it on 12.12.2008. (Annexure - page -18-21)
f). In due course appellant also got no dues certificate up to 2010 from the % the Excise and Taxation commissioner at Baddi and still paying AMC payments to HPSIDC. (Annexure -
page - 22-23) About process of Manufacturing:-
After Procured the Raw materials like PCB's, Ram, Cabinet, High and Low transmission wireless adaptors and wireless antenna components etc., The appellant company designed a CPU without Hard Disc
8 M/s.Gemini Communication Ltd In that CPU an indigenouslv designed and structured Steel Panel was inbuilt with the CPU.
On that Structured Steel Panel an empty chip called E-Phom was fixed at a place which was structured by the appellant company. Itt:xt to the above, based on the requirements the High or Low transmission wireless adaptor was built in by the appellant on the structured steel panel inside the CPU.
Then, software called Red Hat Linux software specifically developed for the project requirement was transferred from the Master data to the empty E- Phorn chip.
This software loaded chip only, allows accessing the frequency with the Centralized admin Network of the Customer.
With all these manufacturing process a distinct and different new product will come out to suit the unique requirement of the customer.
In the case of UPS, generally UPS are available with 5AMS output or discharge points, it is not enough or suitable for the use of networking based units. So, after procuring the 5AMS single output UPS, the appellant removed the Back panel and low density wires connected with battery and fixed their own pre' designed panel suits for 15AMS delivery or output points which is capable to use multi connectivity spike busters.
This indigenously designed and manufactured product won't be available in the market to anyone. Once the product is dismantled it becomes useless i.e. our process of manufacturing is in separable.
For the above process of manufacturing the requirement of electricity is very minimum i.e. only at the time of transfer of software from the master data to empty E-phorn chip and also for final testing of the product.
9 M/s.Gemini Communication Ltd Also these finished networking products are high in value. less in numbers. compact in size and light weight (except UPS which is small in size high in weight). a minimum number of manpower is enough to produce major value of finished products in a single day.
Para-wise reply of the assessment order:
1.Paras 1 to 5.1 are statements of facts and i'n places were we do not concur we have SUitably replied our side of the facts in our earlier paras.
2.IN reply to para 5.2.1 we would like to humbly state that the AO does not take into consideration that that 8 out of the 10 employees who were employed at parwanoo manufacturing unit belonged to Himachal and the same number was approved by the Member Secretary of the HPSIDC. (Annexure - page 18-20).
Also he did not agree that the PF and ESI contributions are centralized and these payments effected from Head Office Level. The understanding of the business needs to be there for the AO to pass an order which unfortunately is missing. We had repeatedly told the AO that even though the value is large we don't need more people to do this job. In Information Technology and especially in hardware manufacturing a small chip can be the game changer and of very high value. He failed to note that the contract workers were temporary in nature and they were utilized for incidental domestic purpose and there was no need to deduct PF and ESI for them as per concerned Act's. We have provided the pf accounts for the 10 employee's who were working for us in parwanoo. Since the AO is looking at it with a closed mind set these details have not been appreciated by him. U/S 2(12) of the ESI Act is applicable to nonseasonal factories employing 10 or more· persons. The existing wage limit for coverage is Rs.15.000/- (W.E.F 01.05.2010. Previously it is Rs.7.500/-) As per the PF Act. it is only applicable for the establishment employing 20 or more persons. From the above provisions of both ESI and PF Act, it is very clear as for as the HP unit is concerned, it is not necessary to deduct even for the permanent employees of 10 M/s.Gemini Communication Ltd the HP unit. Because, their minimum monthly salary is above the limit specified and the number of employees of the establishment is below 20, specified in PF Act.
3.In reply to para 5.2.2 Right from the beginning all the AO's who have looked into our papers have had a closed mind while looking into the facts. It is amply clear from the AO's statement that he has got a doubt on how so little people can manufacture aRd also equates the revenues of other divisions and geographies. We would like to give a small example to clear this doubt. Let's consider HCL or WIPRD which manufactures computer and other electronic goods. The factory employees only a small percentage of the people for manufacturing while most of the others who are spread across india do the selling and maintenance job. The revenue for a IT Industry cannot be related to the number Of people who have been employed. We don't understand how the AD is relating revenue to the number of people who have been in manufacturing in IT hardware. Today HCL is more than a $ 4 billion company and its hardware sales is less than 10% from its manufacturing unit. The AD fails to note that the HP unit turnover of Rs. 52. 00 Crores was consisting of materials and pre designed accessories worth of Rs.42.70 crores, the value addition part is only Rs.9.30 Crores, for that the salary for the 10 employees for 7-months from the date of Commencement of production is only 14.59 lacs. But for the other 6-branches concerned it is mainly consisting of field assistants for regUlar service, marketing, office and administrative staffs which definitely requires a maximum number of employees incurring huge salary. Most part of the receipts is being spent as salary. So comparison in this angle is not agreeable.
4. In reply to para 5.3.1 to para 5.3.3 we would like to state that the minimum electricity charge for the turnover of RS.52 crores. As already explained the use of electricity is only for testing of the product in the final stage of manufacturing and Rs. 79,000/- was only for 7-months. The comparison of electricity charges 11 M/s.Gemini Communication Ltd with RS.52 crores turnover of networking based products is not justifiable. Also as earlier mentioned more than Rs.42 Crs of the RS.52 Crs turn over was bought out items and hence it is unfortunate that the AD is unable to understand the effective load that will be required to manufacture and put together a fully functional product is low and not very high. We would only request the department to understand the nature of business and while such products can be manufactured at home itself without much of spend on electricity it is but obvious that the charges of electricity will be low.
5. IN reply to para 5.4 we strongly object to certain conclusions that the AD is making on relating the place of purchase to the end user locations. We would like to state that we had given all the documentation in this regard and it was not properly considered. All delivery challans have been handed over to the AO before he had made the order. We would like to submit that the purchases were made by the appellant was only raw materials and not usable as final product. For example appellant procured plain cloth; it is not wearable, after stitching with button and threads etc the cloth become wearable one. Like wise the appellant did manufacturing with all the accessories and also with the pre designed materials only then the product becomes a new and commercially salable Product. Mere trading is not possible on the procured raw materials. The product supplied to the end client is vastly different from the product bought out from the vendors. In the interest of saving cost for our company we had requested all the vendors who were giving us products to the tune of more than Rs.42 Crs to ship the materials to our manufacturing unit at HP and since it does not take much time to manufacture our design in to the products supplied by the vendor the vendor in the same transport was asked to deliver the materials till the end customer location. This saved us transportation cost and a lot of other formalities when it came to transportation. It is important to note that the total cost of purchase includes the transportation cost as well. Also it is wrong that the AO stated that transportation of these materials fetch 12 M/s.Gemini Communication Ltd huge amount of transport. As far as the networking products are concerned the value is high, low in weight, small in size. For example a Chip: - Maximum size is equal to cell phone battery, value is Rs.20,000/- or more. To transport 1000 number of this chip, a brief case and a motorcycle is more than enough, the value of this material comes to Rs.2,00,00,000/. So, assumption and suspicions are not having any basis. Also the AD mentioned that there is no mentioning of shipping address in the purchase invoices. This statement is disproved by the AD himself while passing the order uls 143(3) the AD enclosed some purchase invoices submitted by the appellant which all have clear cut details.
6.In reply to para 5.5.1 it is a generic reference· from the auditor but he has also provided for 80lC in which he is clear that manufacturing has actually happened. The AD pointed out that in the P&L alc of the HP unit under the expenditure head it was mentioned that "cost of materials for resale". Using a common word in the preparation of accounts and audit reports are quite natural and it won't be highlighted as merit for disallowance. If this is considered as merit then in the Income tax return form, where it was mentioned "purchases (net of refunds and duty or tax, if any)" how to consider this? (What for assessee's having business income without purchase). Also this is the form for all types of assessee's who are doing trading, manufacturing and services etc.
7.In reply to para 5.5.2 we can only state that the AD has either deliberately or with a lack of knowledge in the field that we are in tried to disprove, there is no manufacturing only trading is done at HP unit. For that, he enclosed the purchase bills of UPS and CD's and Floppy discs. Regarding this required amount of explanation has been provided in the earlier paragraphs. We would once again state that the purchase of materials that we did out of our HP unit underwent a sea change. It is very clear that commercially different product which comes out of an activity can be called as manufacture. After processing done by the appellant the product becomes a distinct article and the basic 13 M/s.Gemini Communication Ltd character of the components changed, also it become commercially usable to suit the requirement of customers. The AD wants to look at it from a one sided angle on only those invoices in which we make lesser profits. We look at it from a project perspective and hence individual product values do not matter for us. It is very clear that on the ups front we had changed the 5 amps to a 15 amps socket and also we had imported all the software into the e-prome that was designed and manufactured by us which gave the product its final shape.
8.In reply to paras 5.6.1 and 5.6.2 the AD conveniently highlighted some portion of the audit report and omitted to look in to the other areas of the audit report i.e. in SI.no 29 & 30 of the audit report it was clearly certified by the auditor about the eligible deduction in the form issued under rule 18888.
9.In reply to para 5.7 the AD fails to understand that a word "single window"
means all under one roof. It is very unfortunate that the learned AD not able to find the same in the website of the HPSIDC also raised this as a failure in the part of the appellant which is not fair. This is a issue of the govt and the AD wants us to change the rules of the HP state to suit his needs. When states attract investments from corporate it is a known fact that a single window clearance is given and the same was given to us as well.
10.In reply to para 5.8 it is yet another instance were the AD has failed to go through our records in full and based on doubts and with a prefixed mind set has issued the order. We have received the permanent registration and hence in the ADs own words since we have got the permanent registration it can be inferred that we have satisfied the conditions for provisional registration which is manufacturing the govt has issued the permanent registration.
11.In reply to para 5.9.1 to 5.9.3 the AD has made this remark not understanding business dynamics. The sale is not merely on the components purchased during the period but it could include stock that had been there prior as well. Also we consider it as projects and in certain products we make less margins and compensate it with others were in we have far better margins. It is 14 M/s.Gemini Communication Ltd not proper to compare this way. The AD clearly is contradicting himself from his comments in para 5.5.2 were in when we make less margins on manufacturing he says it is trading and when we make more margins he also says it is trading.
12. In reply to para 5.10.1 and 5.10.2 it was frequently explained by the appellant that he was not running a showroom to keep huge amount of stocks in its godown. The procurement of raw materials was on the basis of project requirement only. But for the AD with his own assumption and findings that there was no closing stock was present at HP unit, hence there was no manufacturing. Also the AD raised a doubt about the just in time procurement for the project. In this present socio and economic scenario nothing is impossible and the procurement of any type of stock is possible within some hours in and around the world. This kind of findings of the AD does not have any merit. We undertake projects and we are not doing retail sales at all. Hence the basic model of business is different from the one our learned AD's point of view. In many of his discussion the AD himself contradicted with his findings such as in one paragraph he mentioned that there was no list of purchase anti in another he mentioned that "as per the detailed list of purchase submitted by the assessee". Most of the findings of the AD are not a valid one and it clearly proves the pre determined mindset.
13.In reply to para 5. 11 it is very clear that we had used our vendors to send the equipements from were ever they sell it from and deliver it to the customer location. It was strategy to reduce cost in transportation and also to reduce back office expenses.
14.In reply to para 5.12.1 and 5.12.2 there is no merit in the AD assuming wishfUlly that the details of a manufacturing unit should be given in the directors reporl. It can be seen that we had made public announcements on this and most of the leading dailies had carried this. Also to all the statutory bodies we had clearly informed at the right time and taken approval.
15 M/s.Gemini Communication Ltd
15. In reply to para 5.13 the AD frequently raised doubts about that the process of assembling would amount to manufacture or not, In this connection your Honor's kind attention is invited to the following judgments a.CIT, Delhi Vs.Mls Oracle Software India Ltd (C.A.No.235 of 2010 Dt:13.01.2010 -SC) b.crr -Mumbai Vs Emptee Poly Yarn Pvt Ltd (C.A.No. 786 of 2010 Dt:20.01.2010
-SC) c.ITO udaipur Vs Arihant Tiles & marbles P Ltd (C.A.No.8036 of 2009 • SC) d.Titanor Components Ltd Vs. CIT (04.02.2011- DELHC) e.CIT Vs. Jindal Phot Industries I Pvt Ltd (Mad. HC - 16.02.2006) f.CIT V. Sesa Goa Ltd (2004) 271 ITR 331 - SC.
16.In reply to para 5.14 we would only like to state that we have submitted all the relevant documents and that all the AD's who had seen them have not applied there mind and looked at it from a closed mind set. It will be proved by the fact that even after the direction issued by the Hon'ble High Courl the AD did not concentrate in finding the correct returned income of the appellant but simply imporled the figures from his predecessors.
17.In view of the above submission it is prayed that the Hon'ble CIT(A) may kindly cancel the Assessment made by the ACIT and render justice."
7. The CIT(A) after considering the submissions of the assessee, held as under:
16 M/s.Gemini Communication Ltd "6. I have carefully considered the facts of the case and the submissions of the Id.AR. I have also gone through the decisions relied on by the Id.AR and the AD. I have also perused the details of documents filed by the appellant in support of the claim for deduction u/s 80-IC. The issue for adjudication is whether the appellant is eligible for deduction u/s 80-IC and if so, the quantum of such deduction. Before deciding the first issue, it would be proper to reproduce section 80-IC which reads as under:
80-IC. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3).
(2) This section applies to any undertaking or enterprise,-
( a ) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning-
( i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, 17 M/s.Gemini Communication Ltd in any of the North-Eastern States;
( b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning- ( i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States. (3) The deduction referred to in sub-section (1) shall be- ( i) in the case of any undertaking or enterprise referred to in sub-clauses (
i) and ( iii ) of clause ( a ) or sub-clauses ( i) and ( iii) of clause ( b ), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year;
( ii) in the case of any undertaking or enterprise referred to in sub-clause (
ii) of clause ( a ) or sub-elause ( ii) of clause ( b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains.
(4) This section applies to any undertaking of enterprise which fulfils all the following conditions, namely:-
( i) it is not formed by splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; ( ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation. -The provisions of Explanations 1 and 2to sub-section (3) of section 80- fA shall apply for the purposes of clause ( ii ) of this sub-section as they apply for the purposes of clause ( ii) of that sub-section.
"
6.1 This section has been inserted from assessment year 2004-05, in order to give effect to new packages of fiscal and non-fiscal concessions for special category states of Himachal Pradesh, Uttaranchal, Sikkim and
18 M/s.Gemini Communication Ltd North-Eastern states, announced by the Union Cabinet. Consequent to this, deductions u/s 10C and 80-1B(4) is not available in respect of undertaking or enterprises eligible for deduction under this section from A.Y.2004-05. The deduction is granted broadly to undertaking or enterprise referred to in either clause (a) or (b) of sub-section (2). Clause
(a) of sub-sec (2) is applicable where the undertaking or enterprise is located in a notified area and is engaged in manufacture or production of any article or thing not specified in the Thirteenth Schedule. Industrial estates I areas in Himachal Pradesh have been notified vide S.O.1269(E) dated 4.11.2003. Clause (b) of subsection (2) is, on the other hand, applicable where the undertaking or enterprise is located in any other area, not being a notified area, and is engaged in manufacture or production of any article or thing or commences any operation, that is specified in the Fourteenth Schedule. The following provisions of section 80-IA are applicable, so far as may be, to the eligible undertaking or enterprise under this section: (i) deduction is to be computed as if the eligible business is the only source of income, (ii) deduction is available only when the accounts of the undertaking are audited and the audit report in the prescribed form is furnished along with the return of income,
(iii) profits of the undertaking can be recomputed in certain cases, (iv) no deduction available under any other provision of Chapter VIA (in respect of certain incomes), (v) Central Government may withdraw exemption by notification, (Vi) benefit of deduction is switched over in respect of the remaining period in case of amalgamation or demerger and (vii) audit report is to be obtained in Form NO.10CCB.
6.2 The appellant is engaged in the business of manufacture and service of communication and networking products mainly for state government and Central government undertakings such as TNEB and BSNL. It has also supplied its products to other private customers also. The sales made to the above two government undertakings was 19 M/s.Gemini Communication Ltd RS.37.62 crores (TNEB- Rs. 35.65 crores and BSNL- RS.1.96 crores) out of the total sale of RS.52.61 crores. During the year under consideration, the company did project for Tamilnadu Electricity Board for centralization of various collection centres with the administrative network for the whole state. For this purpose, the appellant purchased and imported PCBs, RAMs, high and low transmission wireless adaptors, wireless antennae components, flash Ram software, Red Hat Linux software and other networking components. Using these components, the company redesigned, developed and manufactured a single product to suit the requirement of the project. The end product was a distinct article and became a marketable product. In order to produce the above product, the appellant got provisional registration from Himachal Pradesh State Industrial Development Corporation (HPSIDC) on 22.8.2005 after making the necessary deposit. It started its manufacturing I production activity from a rented premises at MIG-4, Sec-3, Parwanoo, Solan District, Himachal Pradesh. It may be stated that the appellant subsequently got permanent registration from HPSIDC on 12.12.2008. The appellant is also registered with CST and HPGST authorities. It was subsequently allotted land at Baddi, District Solan on 20.12.2005. It took possession of the land on 18.1.2006. It received the approval of the plan to construct factory on 9.6.2006. The appellant received power release certificate for its factory from HPSIDC on 21.1.2007. After inspection and fulfillment of the terms and conditions, HPSIDC issued permanent registration Certificate on 12.12.2008. The appellant has also received Central Excise Registration Certificate on 25.7.2008 for manufacturing of excisable goods. The appellant has also filed annual sales-tax return with HPGST on 29.05.2006. It also got no dues Certificate up to 2010 from the office of the Excise and Taxation Commissioner at Baddi. It was also paying AMC to HPSIDC even in the year 2010. It is clear from the above details that 20 M/s.Gemini Communication Ltd the appellant had, in fact, carried on its business operation at Parwanoo, Dist.Solan (H.P.). The Hon'ble Supreme Court in the case of Bajaj Tempo Ltd v. CIT (62 Taxman 480) has held that a provision in the taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.
6.3 The second aspect is whether the appellant is carrying on "manufacturing or production" as required u/s 80-IC of the Act. A perusal of the various processes demonstrated by the appellant, as submitted by the Id.AR (reproduced at page 4 of this order), shows that the appellant is carrying on manufacturing activities. The provisions of section 80-lC states that it applies to any undertaking or enterprise which has begun or begins to manufacture or produce any article or thing not being any article or thing specified in Thirteenth schedule. Admittedly, the appellant has commissioned the unit during August, 2005 at Parwanoo. The fact that the unit was started on the basis of provisional registration and not on permanent registration would not make any difference to the claim for deduction u/s 80-lC. The process to get permanent registration takes time because various formalities including inspection by the authorities of the Department of Industries, Himachal Pradesh, is required to be completed before issuing the permanent registration certificate. Hence, absence of permanent registration would not be a ground to disentitle the appellant from the legitimate claim of the deduction. Be that as it may, the appellant on fulfilling the terms and conditions of the Department of Industries, Himachal Pradesh received the permanent registration on 12.12.2008. Coming back to the manufacturing process, the appellant, after procuring 21 M/s.Gemini Communication Ltd the raw materials like PCBs, RAM, cabinet, high and low transmission wireless adaptors and wireless antenna components etc., designed CPU without hard disk. An independently designed and structured steel panel was inbuilt with the CPU. On the structured steel panel, an empty chip called E-Prom was fixed at the designated place. Subsequently, based on the requirements of high or low transmission, wireless adaptor was built in on the structured steel panel inside the CPU. A software named Red Hat Linux software specifically developed for the TNEB project was then transferred from the master data to the empty E-Prom chip. This software loaded chip was only allowed to access the frequency with the centralized administration network of the TNEB and other customers. Due to these processes, a distinct and different new product emerges to suit the specific requirement of the concerned customers. Also this indigenously designed and manufactured product would not be available in the market to any other person. It is thus clear that after several processes as aforesaid, manufacture of CPU without hard disk takes place. In other words, in the course of manufacture, the raw material/inputs used therein undergo several processes and a new commercial product comes into existence which is a distinct and separate commodity having its own character, use and name.
6.4 Let us now discuss various precedents against the above factual background of the appellant. The Hon'ble Supreme Court in the case of India Cine Agencies v. CIT, 220 CTR 223 was considering deduction u/s 80-HH and 80-1 of the Act. It considered the word 'manufacture' with reference to Black's Law Dictionary, Webster's New International Dictionary and Advance Law Lexicon (Third Edition) and held that the moment there is a transformation into a new commodity known as distinct and separate commodity having its own character, use and name, 22 M/s.Gemini Communication Ltd whether be it the result of one process or several processes, manufacture takes place and liability to duty is attracted. Etymologically the word manufacture properly construed would doubtless cover the transformation. It is a transformation of matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially as such from that point of view is a question depending upon the facts and circumstances of the case [Empire Industries Ltd v. UOI 1985 (3) SCC 314.]. The aforesaid aspects were highlighted in Kores India Ltd v. CCE, 2005 (1) SCC 385 in the background of Central Excise Act, 1944 and Central Excise Rules, 1944. The Hon'ble Supreme Court relying on its own decisions in Empire Industries and Kores India (supra) held in the case of India Cine Agencies (supra) that conversion of jumbo rolls of photographic films into small flats and rolls in desired sizes would amount to manufacture or production eligible for benefits u/s 80-HH and 80-1 of the Act. The raw materials I products used in the course of manufacture undergo several process and a new commercial product comes into existence which is commercially known as a distinct and separate commodity having its own character, use and name. If the product I raw material does not undergo any process, such a product cannot be sold in the market as it is and hence a new and distinct product comes into existence only after undergoing certain process and thereafter assumes a distinct name, use and character.
6.5 When a commodity undergoes a change as a result of some operations performed on it or in regard to it, such operations would amount to processing of the commodity. But it is only when a change or a series of change takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead it is 23 M/s.Gemini Communication Ltd recognized as a new distinct article that a manufacture can be said to take place. The Hon'ble Supreme Court in the case of Titan Medical Systems Pvt. Ltd v. Commissioner of Customs, 2002 (11) LCX 0086 held that the words 'substantial manufacture' appear to indicate that there need not necessarily be any manufacture but any activity, including activities like assembly which result in a new product, which is commercially a new product from what is imported would be sufficient. The words 'substantial manufacture' do not indicate in any manner that substantial amount of components must also be manufactured.
6.6 The Hon'ble Supreme Court in the case of CIT v. Oracle Software India Ltd was considering whether the process by which a blank compact disc (CD) is transferred into software loaded disc constitutes manufacture or processing of goods in terms of Section 80IA(1). It was observed that if an operation I process renders a commodity or article fit for use for which it is otherwise not fit, the operation I process falls within the meaning of the word "manufacture". For this, the Hon'ble Court referred the decision in the case of United States v. International Paint Co., reported in 35 C.C.P.A. 87, C.A.D. 76. It also referred to the decision of the Supreme Court in case of Gramophone Co of India Ltd v. Collector of Customs, Calcutta, 114 ELT 770. In that case, the question which arose for determination was whether recording of audio cassettes on duplicating music system amounts to manufacture. The answer was in the affirmative. It was held that a blank audio cassette is distinct and different from a pre-recorded audio cassette and the two have different use and name. In the present case also, the final product is different from the various raw materials or products used to produce the same. After procuring various raw materials like PCBs, RAM, cabinet, high and low 24 M/s.Gemini Communication Ltd transmission wireless adaptors and wireless antennae components etc, the appellant designs CPU without hard disk which is a distinct and different new product from the raw materials used to produce it.
6.7 The Hon'ble Madras High Court in the case of CIT v. M.R. Gopal (58 ITR 598) held that conversion of boulders into small stones is a manufacturing process and an assessee engaged in such process is entitled to deduction. The Hon'ble HP High Court in the case of CIT v. Janak Raj Bansal (229 CTR 89) held that converting limestone into limestone powder is a manufacturing activity for the purpose of deduction u/s 80-IA I 80-IB. The Hon'ble Supreme Court in the case of ITO v. Arihant Tiles and Marbles Pvt.Ltd (186 Taxman 439) held that conversion of marble blocks into slabs and tiles and polishing is manufacture. The Hon'ble Madras High Court in the case of CIT v. Jamal Photo Industries (I) (P) Ltd, 203 CTR 256 I 205 CTR 427 held that processing of film and printing photographs from negatives amounts to a manufacturing activity. Printing of paper labels constitutes manufacturing so as to entitle assessee engaged in such activity to deduction u/s 80-IA, as held by the Hon'ble Madras High Court in the case of CIT v. Balaji Hotels & Enterprises Ltd (311 ITR 389).
6.8 The Hon'ble Bombay High Court in the case of CIT v. Tata Locomotive and Engineering Co.Ltd (86 ITR 325) held that. both the words 'manufacture' and 'produce' mean bringing into existence of something which is different from its .components. Thus, assembling of automotive bus I truck chassis from imported parts in a knocked down condition would give rise to an article which is totally different from the parts. This is so even though the component parts from which the automotive chassis is made retain their individual identity in the whole 25 M/s.Gemini Communication Ltd article which is thus manufactured or produced. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Mahesh Chandra Sharma (178 Taxman 22) held that where the assessee was engaged in manufacturing of motorcycle wheels by assembling raw materials I components, viz., rim, tyre, tube, bearing, drum spoke, nipple and collar by carrying out intermittent processed, process of assembling carried out by assessee amounted to manufacture or production of an article. The Hon'ble Delhi High Court in the case of CIT v. Jackson Engineers Ltd (231 CTR 348) held that activity of assembling gensets from various components amounts to manufacture or production of any articles or things.
6.9 In the present case also the final product i.e. CPU without hard disk is different from the various raw materials or products used to produce the same. After procuring various raw materials like PCBs, RAM, cabinet, high and low transmission wireless adaptors and wireless antennae components etc, the appellant designs CPU without hard disk which is a different and new product from the raw materials used to produce it. Following the ratio of the decisions of the Hon'ble Supreme Court and various High Courts cited supra, I am of the considered opinion that the appellant is engaged in the business of manufacture and production of article specified in section 80-IC and is, therefore, entitled for benefits of section 80-IC of the Act. The same is allowed Subject to the following discussion and adjustments:
6.10 It is seen from the details submitted by the appellant that the turnover of the Parwanoounit includes sale of articles which involves complete manufacturing process as well as some other items which do not require any manufacturing process. From the details, it is found that the turnover of the items which has been manufactured at the Parwanoo unit amounts to Rs.41, 15,48,964/-including sale of Rs.35,65,40,978/- and Rs.1,96,83,582/- to TNEB and BSNL, Orissa respectively. The 26 M/s.Gemini Communication Ltd turnover of various items which really do not involve manufacturing process was Rs.11,45,80,6891-. Such products are CDs, floppy disk, printers, ribbons, tables, data cards, UPS etc. The above products, from whatever angle one may look at, cannot be considered as part of any manufacturing or production eligible for deduction uls 80-IC. The AO in the assessment order had also mentioned some examples at para 5.5.2.
The main clients with whom the appellant has only traded in goods were MIs Mantra Cyber Tech, MIs. Tera Software and MIs. Everonn System India Ltd amounting to Rs.3,87,45,9001-, Rs.2,46,74,2501- and Rs.4,72,03,121/respectively. The profit margin, as admitted by the Id. AR, in respect of the goods sold to Tera Software and Everonn System India Ltd was 1.80%. In respect of the other customers, the margin was 3% baring only a few where it was 2%. Hence, the profit on trading is taken at 1.80% in respect of sales made to Tera Software and Everonn System India Ltd. For the other customers, the margin is taken at 3%. The total profit on such· trading items of Rs.11,45,80,689/- would be Rs.25,74,893/-. Since this profit was not derived by the appellant from manufacture and production of any article or thing from its Parwanoo unit, the appellant is not eligible for deduction u/s 80-IC on such profit. The AO is directed to reduce the same from the quantum of deduction claimed u/s 80-IC.
6.11 It is further seen from the details furnished by the appellant that certain expenses like freight expenses, sundry expenses and directors remuneration have not at all been allocated to Parwanoo unit. . The Id. AR was asked to explain as to why the expenses have not been debited to the account of Parwanoo unit. He has given the break-up of freight and sundry expenses and has stated that the incidental / contract labour payments are fully charged to the accounts of its Delhi branch. Further, pre-operative expenses such as registration fee, incorporation fees and expenses paid to HPSIDC etc have not been accounted for at Parwanoo 27 M/s.Gemini Communication Ltd unit, but debited to Delhi branch.
6.12 I have carefully considered the facts of the case and the submission of the Id. AR. It is seen that the Parwanoo unit is controlled by the Delhi branch of the appellant. In order to increase the exempted profit (deduction u/s 80-IC), the appellant has debited part of the expenses of Parwanoo unit in the accounts of Delhi branch. The incidental/contract labour payments of Rs.22,83,782/- and miscellaneous expenses of Rs.2,94,884/- pertaining to the Parwanoo unit has been debited to the Delhi branch. Similarly, incidental labour for projects at Hyderabad amounting to Rs.9,84.367/- pertains to the sale of goods manufactured at Parwanoo unit which was supplied to BSNL, Orissa. These expenses are directly related to the exempt income. The AO is directed to reduce the profit of the 80-IC unit by the above amounts totaling to Rs.35,63,033/-.
6.13. It is further seen that RFID expenses of Rs.11,21,074/- has been included under the head sundry expenses. These pertain to the goods manufactured by the appellant at its Parwanoo unit and are directly related to the said unit. The AO is accordingly directed to reduce the profit of Parwanoo unit by the above amount.
6.14. It is further seen that no freight expenses has been debited to Parwanoo unit. As stated earlier, the freight charges of Rs.10,83,241/- pertaining to Parwanoo unit has been debited to its branch at Delhi. The appellant has also incurred freight charges of Rs.5,94,813/- and Rs.6,69,439/- in respect of its operation at Chennai and Coimbatore. . Since these expenses are related to set up of communication and networking products of TNEB, they are directly related to the sale of items manufactured by the Parwanoo unit. Accordingly, the A.O. is directed to reduce freight expenses of Rs.23,47,493/- from the Profit of Parwanoo Unit.
,;_.~ 28 M/s.Gemini Communication Ltd 6.15 The appellant has also not allocated any portion of the directors remuneration of RS.17.98 lakhs to Parwanoo unit. The directors are taking decision on all crucial issues for all units of the appellant including Parwanoo unit. Hence, it would be reasonable if the above expenditure is also allocated to Parwanoo unit on the ratio of turnover of the above unit (Rs.52.61 crores) to the total turnover RS.126.16 crores) of the appellant. The AD is accordingly directed to allocate directors' remuneration of Rs. 7 ,49, 784/- to Parwanoo unit and reduce the profits of the above unit to that extent.
6.16.The electricity charges of Parwanoo unit was Rs.79,OOO/- only. The appellant, on the other hand, has debited RS.6.71 lakhs to the other units. The Id.AR explained that electricity is required only for testing of the product in the final stage and hence the amount debited is reasonable. The Id.AR also stated that most operations at Parwanoo unit are labour oriented and hand processed. Therefore, the power consumption is low. The same is considered but the explanation is not acceptable because the expenses claimed is too low to accept it as reasonable. It is thus clear that the appellant has not allocated the correct expenditure on electricity, so as to inflate the profit of Parwanoo unit. It would be reasonable if the above expenses are allocated on the ratio of turnover of the exempt unit to total turnover of the appellant. The share of Parwanoo Unit comes to Rs.3,12,758/-. The AD is accordingly directed "\to reduce profit of Parwanoo unit by Rs.3,12,758/-.
6.17. The appellant has debited rent of Rs.72,OOO/- only to the accounts of Parwanoo unit. It was found by the Inspector of Income-tax, D/o.Dy.DIT(lnv), Shimla, on field enquiry, that the premises at Parwanoo 29 M/s.Gemini Communication Ltd had been taken on rent @ Rs.25,000/- per month by the appellant from one Mr. Vivek Saini. The total rent for seven months would be RS.1 ,75,000/-. The appellant has not debited the actual rent so as to inflate the profit of Parwanoo unit. The AD is, therefore, directed to reduce excess rent of RS.1,03,OOO/- from the profit of Parwanoo unit.
In the result, the AO is directed to allow the deduction claimed by the appellant u/s 80-IC after reducing the amounts discussed in paras 6.10 to 6.17 above. The ground is partly allowed.
After considering the submissions on all the grounds, the appeal is partly allowed. "
8. Ld. D.R. vehemently argued in support of the order of the A.O. He submitted that the decisions of the Apex Court in the case of U.O.I Vs. Delhi Cloth & General Mills Co. Ltd. (AIR 1963 SC 791), India Hotels Co. Ltd Vs. ITO (245 ITC 538) and Prabhat Sound Studios Vs. Addl. CCE (107 STC 70) stipulates that manufacturing is a process or series of processes by which a new end product is produced from the raw material and which is altogether a different commodity in its physical and chemical form. He submitted that the assessee was only doing assembling work of Radio Frequency Identification Device (RFID) readers which are net work equipments 30 M/s.Gemini Communication Ltd forming part of information and communication technology industry at Parwanoo Unit, Himachal Pradesh(H.P.).
9. On the other hand, the A.R. of assessee supported the order of the CIT(A). He submitted that the finished product manufactured at Parwanoo unit in H.P. was Radio Frequency Identification Device (RFID) readers, which is quite distinct and different from the various raw materials and components used to manufacture the same. The raw-materials or components were PCB's, Ram, Cabinet, High and Low transmission wireless adaptors and wireless antenna components etc., Red Hat Linus Software, E-Phom Chip. He also submitted that the above is used to receive the frequency with the Centralized admin Network of the Customer for which the raw-
materials cannot be used. Thus, he submitted that there is no error in the order of the CIT(A).
10. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The main contention of the D.R before us is that as the process involved in 31 M/s.Gemini Communication Ltd producing RFID was assembling of components or parts and therefore, the activity of the assessee was merely assembling and consequently not manufacturing, which entitled the assessee for deduction/s 80-IC of the Act. We find that no material has been brought before us to dispute the submissions of the ase that the RFID, which is the finished product of the assessee's industrial undertaking at Parwanoo unit in H.P. is distinct and different from the various components on assembling of which the same is produced.
11 Further, it is also observed that the D.R could not dispute the submissions of the assessee that the use in which RFID is used cannot be undertaken by the various components. We are therefore, of the view that RFID is an article or thing distinct from the various components used in producing the same and the components cannot be used for the purpose for which the RFID is used. Therefore, in view of the decision of the Hon'ble Supreme Court in the case of Oracle Software India (supra) wherein it was held that if an operation / process renders a commodity or article fit for use for which it is 32 M/s.Gemini Communication Ltd otherwise not fit, the operation/ process falls within the meaning of the word "manufacture".
12. Further, the main thrust of the Revenue is that as the process undertaken by the assessee in its industrial undertaking is assembling and therefore, it is not manufacturing, cannot be supported in view of the decision of the Hon'ble Allahabad High Court fin the case of CIT Vs. UP State of Agro Corporation 188 ITR 370 wherein the activity of assembling imported component parts into a tractor has been held to be manufacturing.
13. Similarly, recently the Hon'ble Delhi High Court in the case of CIT Vs. Jackson Engineering Ltd. [2012] 341 ITR 518(Del.) has also held that the activity of assembling gen sets from various components was manufacture.
14. We find that no specific error in the order of the CIT(A) could be pointed out by the D.R. In the absence of any specific error being pointed out in the order of the CIT(A), We do not find any good and 33 M/s.Gemini Communication Ltd justifiable reason to interfere with the order of the Commissioner of Income Tax(A). It is confirmed. The grounds of appeal of Revenue are dismissed.
15. In respect of Cross Objection of the assessee, in absence of any serious arguments made by the A.R. on the grounds of Cross Objection taken by the assessee, the same are dismissed.
16. In the result, the appeals of Revenue as well the C.O. of assessee are dismissed.
Order pronounced on Friday , the 9th November, 2012 at Chennai.
Sd/- Sd/-
(S.S.GODARA) (N.S.SAINI)
Judicial Member Accountant Member
Chennai,
Dated the 9th November, 2012.
K s sundaram.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file