TaxTMI 
TaxTMI 
2010 (6) TMI 645
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....ms at Jodhpur. The assessee submitted its return of income declaring total income at Rs. 4,58,780 after claiming deduction under section 10BA amounting to Rs. 1,43,75,541 and deduction under section 80-IB at Rs. 1,54,929 on manufacture and export of handicraft items. The Assessing Officer held that the business of the assessee was the same as that of assessment year 2004-05 and therefore, the findings for assessment year 2004-05 were squarely applicable for the assessment year under consideration. The Assessing Officer concluded that the assessee had been making purchases from the local artisans and craftsmen at low price, and selling those products abroad at a very high price and siphoning away the profit which should have actually gone to those artisans and craftsmen. The business of the assessee was more of a 'trader' or a 'middleman' and not that of a 'manufacturer'. Therefore, the Assessing Officer held that the assessee had not fulfilled the basic condition laid down under section 10BA(2)(a) which states that the undertaking should manufacture or produce the eligible articles or things to claim the exemption under section 10BA of the Income-tax Act. Similar finding is given b....
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....ng of these sections, it is clear that Legislature did not intend or stress upon the manufacturing in very deep and technical sense. The learned AR submitted that even the title of the section says 'special provisions in respect of export of certain articles and things'. This section merely requires an assessee to export a wooden handicraft item having artistic value. The learned AR submitted that requirement of manufacturing and production by the assessee for the entitlement of exemption under section 10BA has to be understood in the context of the specific language and other requirement of the said provision. The learned AR in support of his contention relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 . The learned AR submitted that the word 'manufacturing' or 'production' is being used in Explanation (b) to section 10BA. What the assessee purchased from its supplier is semi-finished furniture and then converting it into articles of artistic value, which is the requirement of section. The learned AR submitted that this section does not require assessee to manufacture entire furniture/articles. The learned AR submi....
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.... in respect of such articles nears to total turnover of the business carried on. The learned AR further submitted that other types of section are where there is no formula prescribed but merely stated that income attributable to such undertaking such sections are various sub-sections of section 80-I, 80-IA, 80-IB, 80-IC. The learned AR submitted that question of interpretation comes into picture. In the judgment of Hon'ble Supreme Court in the case of Liberty India and Sterling Food where no such specification is being given in the section. The learned AR drew our attention to the provisions of section 10BA(4), which define the amount eligible for deduction. The learned AR submitted that the assessee's case fall in the category of first class so the entire profit of the business is to be considered for the purpose of allowable deduction of the assessee. The learned AR in support of his contention relied upon the judgment of jurisdictional High Court in the case of Punit Commercial Ltd. (supra) where the court has held that once the income become part of business income of the assessee, the assessee is eligible for deduction under section 80HHC. The learned AR while referring the ju....
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....on the decision of ITAT Third Member in the case of Arihant Tiles & Marbles (P.) Ltd. v. ITO [2006] 10 SOT 225 (Jodh.) where the benefit under section 80-I has been denied by holding that activities of the assessee do not amount to manufacture. The learned AR submitted that the said 3rd Member decision has been reversed by the Hon'ble Rajasthan High Court in Arihant Tiles & Marbles (P.) Ltd. v. ITO [2007] 295 ITR 148 holding that the assessee was engaged in sawing marble blocks into slabs and tiles after purchasing blocks. It was manufacture of an article. The Hon'ble Supreme Court validates the decision of Hon'ble Rajasthan High Court in ITO v. Arihant Tiles & Marbles (P.) Ltd.. The learned AR further submitted that in case of Kwal Pro Exports ( supra), Tribunal has emphasis on Explanation 4 to section 10B, which says manufacture of produce shall include cutting and polishing of precious and semi-precious stones. The learned AR further submitted that the said decision in the case of Kwal Pro Exports (supra), the Hon'ble Jodhpur Bench subsequently distinguished by the same in same assessee's case Kwal Pro Exports (supra) in subsequent decision of ITAT Jodhpur Bench distinguished ea....
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....rovided that this condition shall not apply in respect of any 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; (c )it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.-The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of this clause as they apply for the purposes of clause (ii) of sub-section (2) of that section; (d)ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things; (e )it employs twenty or more workers during the previous year in the process of manufacture or production. (3) This section applies to the undertaking, if the sale proceeds of the eligible articles or things exported out of India are received in or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year ....
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....mmunication charges or insurance attributable to the delivery of the articles or things outside India; (d)"export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance of any customs station as defined in the Customs Act, 1962 (52 of 1962)." 11.1 There are a number of provisions under Income-tax Act providing for tax concessions for export of goods and services. Section 10BA was inserted in the Income-tax Act, 1961 by Taxation Laws (Amendment) Act, 2003 with effect from 1-4-2004. This section makes special provisions for deduction of profits and gains of business of export of certain articles or things which are referred in the section as 'eligible articles or things'. They are, as per definition in the Explanation, all handmade articles or things, which are of artistic value and which requires the use of wood as the main raw material. One of the import conditions is that the assessee should manufacture or produce eligible articles or things without the use of imported raw materials. Some conditions are akin to those in section 80HHC. Where assessee claims deduction....
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....d section 10B is that section 10B is applicable to a 100 per cent EOU, whereas section 80-IB can be in respect of any unit. In our opinion, therefore, the expression "production" will have the same meaning as in Sesa Goa Ltd. (supra ) and consequently, the question framed is devoid of merits." 11.3 The Apex Court in the case of Vijay Ship Breaking Corpn. v. CIT [2010] 314 ITR 309 wherein after examining the words 'manufacture' and 'production' confirmed the order of ITAT wherein it was held that ship breaking activity gave rise to the production of a distinct and different articles, therefore, the assessee is entitled to deduction under sections 80HHC and 80-I of the Act. 11.4 The ITAT Jaipur Bench in the case of Goverdhan Prashad Singhal (supra) wherein the assessee purchases raw material in the shape of pure wood or semi-wood or semi-finished furniture and makes various types of additions by making artistic design and fittings of boxes, and iron items, inlay castings giving an artistic look to the furniture items, and exported those articles. The ITAT held that product is an altogether different commodity with a substantive value addition. The articles were hand-made and co....
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.... way of job work from outside, fixing artistic accessories, structures and parts thereon to make them fascinating and marketable commodity which was different both in character and use than what these items were originally purchased by the assessee. Merely because some job work has been got done from outside, would not take away the assessee from the scope and meaning of manufacture of articles or products by him. The activity carried out by the appellant thus was not that of giving mere feather touches. Even though the original material did not lose its identity completely yet a different commercial commodity has been brought into existence by the appellant, the end-product so produced being different and distinct both in character and use as well. 20.1 The term "manufacture" has not been defined in Income-tax Act. In the case of Aspinwall & Co. Ltd. v. CIT [2001] 170 CTR (SC) 68 : [2001] 251 ITR 323 (SC) Hon'ble Supreme Court has observed as under : "The word 'manufacture' has not been defined in the Act. In the absence of a definition of the word 'manufacture' it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of....
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....t for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity." 20.7 In a recent judgment by Authority for Advance Ruling in the case of Ramit Kumar Sharma, In re [2009] 221 CTR (AAR) 621 : [2009] 18 DTR (AAR) 209 : [2009] 309 ITR 344 (AAR), it has been expressed that the essence of manufacturing is that what is made shall be a different thing from that out of which it is made despite the original material not losing its identity completely. Accordingly, the raw castings that underwent a substantial change giving rise to a commercially different product as machine casting amounted to manufacture. 20.8 In ITO v. Ramsons Organics Ltd. [2008] 119 TTJ (Delhi) 193 : [2008] 14 DTR (Delhi) 129 : [2009] 28 SOT 57 (Delhi)(URO), the assessee was engaged in the business of processing of stone, marble, granite etc., and exporting the same outside India. It purchased raw stone blocks made of sandstone, marble, granite etc., and then cut the same into desired thickness after calibration. Sliced ....
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....riff Act, 1985 (5 of 1986) as amounting to manufacture, or, and the word 'manufacture' shall be construed accordingly and shall include not only a person who employees hired labour in the production or manufacture of excisable goods but also any person who is engaged in their production or manufacture on his own account. (iii) which is specified in relation to any goods by the Central Government by notification in the Official Gazette as amounting to manufacture Central Excise Act, (1 of 1944) section 2(f)." 20.11 In Arihant Tiles & Marbles (P.) Ltd. v. ITO (supra), Hon'ble Rajasthan High Court has held that: "Marble blocks as a mineral produced from earth by itself are not usable for any purpose and therefore to make them usable various processes could be applied to bring them to that stage which would amount to manufacturing. Under the scheme of the Income-tax Act and the Rules cutting and polishing of marble and granite blocks have been held to be an industrial activity of manufacture. Circular No. 729, dated 1st Nov., 1955 [(1995) 129 CTR (St.) 1] has considered granite as a mineral and any process applied makes it a valuable marketable commodity. Hence conversion of marble ....
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....he respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under section 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax, etc., because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of section 80-IA of the Income-tax Act, 1961." 11.9 The above observations of the Apex Court also applicable in the case under consideration as the assessee is getting some incentives in sales tax etc. As stated above that word 'production' is wider in scope as compared to the word 'manufacture'. Parliament itself has taken note of the ground reality and has amended the provisions of Income-tax Act, 1961 by inserting section 2(29BA) vide Finance Act, 2009, with e....
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.... in the assessee's factory by various artisans displays the Indian art and craftsmanship. The handmade handicraft wooden articles or things so manufactured/produced displays the Indian art, traditional culture and heritage and are purchased by foreign buyers only because of attractive artistic value of such articles. From the activities carried out by the assessee it is clear that the said activities would come within the meaning of the words 'manufactures' or 'produces' articles or things which are of artistic value, thus, the assessee satisfied the main condition for entitle to deduction under sections 10BA and 80-IB of the Act in respect of the respective articles/goods. 11.11 Now we come to other objections of the revenue for not granting deductions under section 80-IB and section 10BA of the Act. In assessment year 2003-04 the CIT(A) partly confirmed the order of Assessing Officer in respect of disallowance of deduction under section 80-IB on the ground that the assessee is not manufacturing the items. However, in respect of purchases of wood Rs. 16,79,568 and iron at Rs. 1,47,570 the CIT(A) held that the assessee is entitled to deduction under section 10BA and under sectio....
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....e on which the manufacture is started. As against all these provisions, it is significant to note that there is no mention about the commencement of manufacture or production for grant of relief under section 10BA. This section is available for assessment years 2004-05 to 2009-10. To put it otherwise, the existing undertakings were not excluded from claiming the benefit under section 10BA. This explanation of the assessee was not considered by the assessing authorities. On perusal of the provisions laid down in section 10BA(2)(b) and 10BA(2)(c), the assessee's undertakings has not been formed by splitting up or reconstruction of a business already in existence and none of the undertakings have been formed by the transfer to a new business of machinery or plant previously used for any purpose, since the assessee has not started any new business and the assessee was carrying on the existing business. Therefore, there is no condition laid down under the Act where the existing business of the assessee having the plant and machinery can be denied deduction under section 10BA(1) of the Act. The deduction is available for a limited period starting from assessment year 2004-05 to assessmen....
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....is year the assessee also claimed deduction under section 80-IB on iron items. The Assessing Officer rejected assessee's claim under section 80-IB on the ground that the assessee is not manufacturer. As per detailed discussion made by us in above Paras we find that the assessee satisfied all the conditions including that the assessee is manufacture/produce the articles. In the light of that finding the claim of assessee is allowed. 11.14 As regards deduction under section 10BA in respect of DEPB, we find that sub-section (4) of section 10BA defines profits derived from eligible articles. Section 28(iiic), (iiid) and (iiie ) provides that these income are profits and gains of business. The said sub-section (4) of section 10BA is reproduced below :- "For the purposes of sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking." The relevant part of section 28 reads as under :- "28. The following inc....