TaxTMI 
TaxTMI 
TaxTMI 
2015 (11) TMI 791
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....80 HHC and not from the assessment year 2004-05, as held by the A.O., without appreciating the facts properly as brought out by the Assessing Officer in the assessment order. 3. The order of the Ld. CIT(A) may be set-aside and the order of the A.O be restored." 3. The assessee company manufactures Compact Florescent Lamp (CF Lamps), Halogen Lamp, Metal Halide Lamps for which purpose it has three units. Unit-I was in NEPZ area and was claiming deduction u/s 10A of the Income Tax Act till financial year 2001-02. The second unit was outside the NEPZ area. The third unit was started during the Assessment Year 2003-04 at Dehradun. The assessee has claimed deduction u/s 80HHC on the basis that it is exporting CF Lamps to other countries. The gross profit ratio shown by the assessee for the assessment year 2004-05 is 29.39 % as against 32.67% in the immediately preceding year. The decrease in the gross profit ration has been explained by the assessee, to be on account of fall in the value of dollar and the assessee explanation was accepted by the Assessing Officer. After examination and discussion with the assessee the following additions disallowances were made to the assessee's t....
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....nting to Rs. 3,13,26,073/- and there is a stock of finished goods with the assessee company valued at Rs. 1,46,38,996/-. Thus, even after showing a sale of Rs. 3,13,26,073/- from the said company, the assessee company has claimed that the unit is under trial run. Vide notice dated 11/10/2006, the assessee company was asked why the year under consideration should not be taken as the initial assessment year for the purpose of Section 80IC of the Income Tax Act, 1961 in respect of unit located in Uttrakhand. Secondly, the company was asked why for the purpose of Section 80HHC of the Income Tax Act, 1961, the sales made by the assessee company from its Uttrakhand Unit not be included in the total turnover. 6. The assessee replied that the unit was only trial run and not had commercial production during the year, and therefore, the year under consideration should not be treated as first year of deduction Section 80IC (3) (ii) of the Income Tax Act, 1961. The assessee further submitted before the AO that the assessee was entitled to claim deduction for 100 percent of profit and gains for 5 assessment years commencing that the initial assessment year and thereafter 30%. The assessee comp....
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....finished goods valued at 1'.46 Crores. This further strengthens the fact that not only manufacturing activity has been undertaken at the Unit but substantial sales have also been made from the Unit. It is important to note that the total turnover of the assessee company which was established about 12 years back is 165 Crores approximately, thus the sales from this small Unit over a very short period of time i.e over one to one and a half month is nearly 2% of the total turnover. iv) For the purpose of undertaking these sales the assessee Company has not only issued proper bills but also paid the various applicable taxes before making these sales. v) The fact that the cost of material consumed i.e 3.98 Crores is less than the total value of sales and the total stock of finished goods (3.13 Crores + 1.46 Crores= 4.49 Crores) further strengthens the case that it cannot be the case of the assessee that the Unit is showing substantial wastage. The mere fact that the unit has some initial losses does not make the period as prior to commencement of production. Moreover the term used in the section is begins to manufacture and not commencement of commercial production. The two term....
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....duce any article'. The term 'begins to manufacture' is required to be understood in the relevant context. Any production changed can be said to have commenced manufacturing only then, the production changed and optimize and establish and the production changed is able to sustain manufacturing in commercial since in the context of the provision manufacturing means production in a commercially sustainable production changed. While analyzing these premises the Ld. CIT(A) considered the relevant case law decided by Hon'ble Madras High Court (110 ITR 168) wherein it has been laid down that 'without applying this test by manufacturing the proto type, the assessee could not be said to have manufactured and article which was capable of being sold by the assessee in the context of tax incentive, and article can be said to have manufactured only when it comes from commercially sustainable production changed and only at this stage article is capable of being sold. The Ld. CIT(A) further held that, in view of high percentage of wastage, the manufacturing in the period under consideration cannot be said to be able to sustained manufacturing in commercial sense. Therefore, the Ld. CI....
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....n respect of Excise and Customs authorities does not amount to any finding that there was no sale prior to commercial productions. The sale totally reflected in the books of accounts and Section 80IC of the Income Tax Act, thus is attracted in the present case. 12. The AR submitted that for the 3 months there was manufacturing but it cannot be termed as commercial production because it amounts to trial production. The AR submitted that the Ld. CIT(A) has properly given the finding. The AR pointed out in paper book which was submitted by him the relevant pages (Pg Nos. 156,157,159 & 160) wherein the defects in respect of CFL Lamps was pointed out and submitted that the machinery and the trial run production took place during the period December 2003 up till January 2004. The assessee also submitted that because of these defects, there was more than 30% wastage and the loss was incurred due to the same. To take benefit of his submissions as relates to the non-application of Section 80IC of the Income Tax Act, the AR submitted that the wastage value during the present assessment year was too high and this amounts to trial production. In fact, as per asssessee, the commercial producti....
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....eduction was taken into consideration in respect of the first sale and its relevant year. The DR submitted the case law of CIT vs. Nestor Pharmaceuticals Ltd. (2010) 322 ITR 631 wherein, it was held that trial production is different from commercial production. In this case, the Hon'ble Delhi High Court held that "the assessee had sold one Water Cooler and one Air Condition before April 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the Water Cooler or aircondition produced and sold by the assessee to the dealer. Things would have been different, if that had happened." The DR further submitted that this case law clearly states that the wastage is not a whole and sole criteria for a trial production. The improvements made by the assessee during the year that would have come under the purview of trial production but it fails further....
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....sent case, though the assessee has claimed that it commenced commercial production in March, 2004, but in reality the commercial production started since the initial set up of the Unit. The invoices submitted by the assessee were also not given the clear picture as to when the first invoice was return back on the reason of not as per the requirement of the customers. In fact, ledger which were given by the assessee for the period 1st April 2003 to 31 March, 2004 clearly shows that there was a continuous transaction/sale to various companies and those companies were repeatedly giving orders to the assessee company. So this cannot be termed as a trial production when there is a continuous sale to a particular company for example in the assessee's case there was 34 transactions/invoices mentioned in the ledger to Bajaj Electricals Ltd. for the period 22nd December 2003 till 24th February 2004 and there was no specific mention that the product/CF Lamps which were sold to Bajaj Electricals were of defective or of any sort of wastage to the assessee company. Thus, the benefit of trial production cannot be claimed by the assessee company and Section 80IC is clearly attracted in case o....