Section 10B deduction survives controlled outsourcing and transfers with the undertaking to a successor company.

Section 10B deduction was held available where part of the manufacturing process was outsourced under the assessee's direct supervision and control, because manufacture is not confined to personally performing every stage and a new, distinct product still emerged from the undertaking. The deduction was also held to continue in favour of the successor company when the entire undertaking was transferred as a going concern with requisite approvals, since the benefit attaches to the undertaking and extends to the resulting company for the unexpired period under section 10B(7A).

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Issues: (i) Whether the assessee was entitled to deduction under section 10B despite part of the manufacturing activity being outsourced under its supervision and control; (ii) Whether the successor company was entitled to continue the section 10B benefit after transfer of the undertaking.

Issue (i): Whether the assessee was entitled to deduction under section 10B despite part of the manufacturing activity being outsourced under its supervision and control.

Analysis: The undertaking manufactured ballistic helmets and bullet proof jackets, and only certain stages of the process were entrusted to a job worker. The raw material was supplied by the assessee, the outsourced work was carried out under its direct supervision, and the finished product emerged as a new and distinct article after the remaining stages were completed at the assessee's unit. The Court held that manufacture under section 10B is not confined to personal execution of every stage by the assessee, and that controlled outsourcing of part of the process does not destroy the character of the undertaking as a manufacturer.

Conclusion: The assessee was entitled to deduction under section 10B on the first issue.

Issue (ii): Whether the successor company was entitled to continue the section 10B benefit after transfer of the undertaking.

Analysis: The entire industrial undertaking was transferred to the successor with the approval of the competent authorities, and the Court treated the transfer as one of the undertaking as a going concern rather than a mere transfer of some machinery. It further held that the insertion of section 10B(7A) and the CBDT circular clarified that the deduction is available to the resulting or successor company for the unexpired period, and that the benefit attaches to the undertaking and not merely to the original owner.

Conclusion: The successor company was entitled to continue the section 10B benefit on the second issue.

Final Conclusion: The questions of law were answered in favour of the assessee, the Tribunal's contrary view was set aside, and the appeals were allowed.

Ratio Decidendi: A section 10B deduction is not denied merely because part of the manufacturing process is outsourced, provided the assessee retains direct control and supervision and a new product emerges, and the deduction continues with the resulting company where the undertaking is transferred as a going concern under section 10B(7A).

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