Tribunal upholds CIT(A) decision, allows deduction for specific products under section 10B. Revenue appeal dismissed, assessee partially successful.

The Tribunal upheld the CIT(A)'s decision, except for directing that profits from specific products be eligible for deduction under section 10B. The revenue's appeal was dismissed, while the assessee's appeal was partially allowed.

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Issues Involved:

1. Deletion of disallowances under section 10B by CIT(A).
2. Profit margin on transfer of intermediates between units.
3. Recomputing profits of both units on an estimate basis.
4. Exclusion of net profit attributable to the sale of specific products from book profits for computing allowable deduction under section 10B.

Detailed Analysis:

1. Deletion of Disallowances under Section 10B:

The revenue's primary grievance was that the CIT(A) erred in deleting the disallowances under section 10B, arguing that the expenses were incurred jointly and apportioned between the general unit and the EOU, thus making the deduction under section 10B not allowable as the assessee did not fulfill the condition under section 10B of the Act. The Tribunal found that this issue was covered in favor of the assessee by decisions of the coordinate benches in the assessee’s own case for several assessment years. The Tribunal noted that separate year-end financial statements for the EOU were provided and no specific defects, except for the inter-unit transfer price, were pointed out. Therefore, the Tribunal saw no legally sustainable merits in the grievance of the revenue.

2. Profit Margin on Transfer of Intermediates:

The assessee's appeal included grievances related to the profit margin of 10% charged on the transfer of intermediates by the general unit to the EOU unit. The CIT(A) had confirmed the AO's view that this margin was to claim excess deduction under section 10B. The CIT(A) observed that the profit and gain of the general unit and the EOU on account of such inter-unit transfers needed to be recomputed as per the provisions of sub-section 8 of section 80IA. The Tribunal noted that the CIT(A) found the market values of WIP indeterminable and directed the AO to compute the profits by distributing them equally between the units. The Tribunal approved the CIT(A)'s action, stating that the allocation of equal profits to both units was fair and reasonable.

3. Recomputing Profits of Both Units:

The CIT(A) recomputed the profits of both units on an estimate basis by distributing the profits equally, as the market value of WIP was not determinable. The CIT(A) provided a detailed computation table and directed the AO to adopt these figures for computing the taxable income and the grant of deduction under section 80IB. The Tribunal found the CIT(A)'s recomputation method to be fair and reasonable, considering the facts of the case and the processing work done by both units.

4. Exclusion of Net Profit Attributable to Specific Products:

The CIT(A) directed the AO to exclude the net profit attributable to the sale of Benzarone Pure and BFX-P from book profits for computing the allowable deduction under section 10B. The Tribunal noted that the CIT(A) held that the process involved in these products was only purification and did not amount to manufacturing a new article or thing. However, the Tribunal found this objection unsustainable, referencing the Supreme Court's judgments in the cases of ITO Vs Arihant Tiles & Marbles Pvt Ltd and India Cine Agencies Vs CIT, which held that even conversion processes amount to manufacturing or production. Thus, the Tribunal directed that the profits in respect of these products would also be eligible for benefit under section 10B.

Conclusion:

The Tribunal modified the CIT(A)'s order only in respect of the exclusion of profits for Benzarone Pure and Di Acid, directing that these profits would be eligible for deduction under section 10B. Except for this modification, the Tribunal confirmed the CIT(A)'s order. The revenue's appeal was dismissed, and the assessee's appeal was partly allowed.

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