TaxTMI 
TaxTMI 
2018 (3) TMI 520
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not a correct finding and deserves to be quashed. 3. That the finding of the Worthy CIT(A) while disallowing the deduction u/s 80IC is against the facts and circumstances of the case and the submission as made during the course of appellate proceedings have not been considered properly. 2. The relevant facts of the case are that the assessee declared an income of Rs. 18,140 after claiming deduction under section 80 IC. The said return was selected for scrutiny. The assessing officer takes note of the fact that the assessee firm claimed that it was engaged in manufacturing and trading of computer parts and peripherals from village Billanwalau Ibana, PRG Dharmshala. The assessee firm it was noted by him comprised of five partners namely M/s Champion computers Pvt. Ltd. (5% share), Sh. Kapil Wadhwa (25%), Sh. Sanjay Wadhwa (25%), Kapil Wadhwa HUF (15%), Sanjay Wadhwa HUF(15%) and V.P. Wadhwa HUF(15% Share). In the course of the scrutiny proceedings, he required the assessee to explain the manufacturing process of the specific items claimed to have been manufactured by it. In response to the same flow chart of processes reproduced at pages 2 and 3 of the assessment order a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the assessing officer and the CIT-A submitted that in the facts of the present case the conclusions drawn by the assessing officer qua the two products and the conclusion drawn by the CIT-A in withdrawing the deduction allowed by the AO on facts was on an incorrect appreciation of law and facts. It was his submission that the Revenue has proceeded entirely on suspicions. Inviting attention to the assessment order it was submitted that whereas the assessing officer had disallowed the benefit of the deduction only on account of the manufacture of two products namely External hard disk and External DVD writer, the CIT-A after issuing enhancement notice has included the other 2 products also manufactured by the assessee namely Computer laptops and Computer mouse. Addressing these two products it was submitted that the AO had allowed deduction only after considering the full facts and after duly satisfying himself qua the claim of the taxpayer. The withdrawal of the deduction by the CIT(A) in the appellate proceedings, it was submitted was not maintainable. Similarly the CIT(A) on facts it was submitted was not justified in confirming the view of the AO qua the relief claimed for t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... [1980] 123 ITR 669 4. Judgment of ITAT Chandigarh Bench in case of Shiva Exports Vs. ITO [2009] 28 SOT 512 (Chd.) 3.3 On the merits of the addition it was submitted that the specific reasons for not allowing the assessee's claim have been set out by the CIT(A) in para 6.1 of his order. Carrying through the specific finding in para 6.1 it was submitted that the CIT(A) has arbitrarily come to the conclusion that no Manufacturing had been carried out by the assessee even in regard to laptops and mouse also. Carrying the Bench through the para 6.1.1 to 6.1.5 from pages 18 to 22 of the impugned order it was submitted that the CIT-A came to the conclusion that no Manufacturing expenses have been debited in the profit and loss account, no qualified personnel was on the rolls no testing equipment or machinery etc. was seen in fixed assets etc. accordingly the assessee was held to have failed to satisfy that it was carrying on any manufacturing activity. The conclusion was supported by the decision of the ITAT in the case of Indian software vs. ITO in ITA 248/Chandigrah/2015. It was his submission that the said decision is not applicable and was fully distinguishable on fact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the product functional and capable of running with the necessary software. Thus for creating the product heavy machinery was not required and it was submitted that there is no such mandate of the Legislature also that heavy machinery necessarily must be used. It was submitted that once the product which involves the assembly of the following separately identifiable parts are assembled, fitted, and made functional by programming and attaching wire, checked, packed and identified as a separate product which function distinctly for the functions identified as on independent product the statutory requirement is fulfilled. As an illustration it was submitted that external DVD Hard Disk entails the purchase of the following separate parts which are utilized: 1) casing which would constitute: a) housing/casing (upper plastic cover); b) housing casing/(lower plastic cover);c) front Bezel (front plastic cover); 2) USB port which would constitute of PCBA/computer circuit board with USB port; 3) USB cables which would include: a) USB cable; and b) connecting wire; 4) drive would include DVD drive; 5) screws; and6) branding stickers/labels. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat it is not required cannot be ignored as no software is required to be specifically written and no heavy machinery is required but the fact that by this activity a separate product comes into existence is the legal requirement which has been discarded on presumptions and surmises. Heavy reliance was placed upon the submissions advanced in Paras 6 and 7 and 8 of the synopsis filed these are reproduced hereunder for ready reference: 6. It is further submitted in this regard that, as a result of the processing / action done on the inputs procured, for the production of the impugned products in case of the assessee, the resultant products completely satisfy the said definition in this regard. Your attention in this regard is brought to the various inputs purchased for different items manufactured by the assessee firm namely: Characteristics/products Product 01 (External/USB DVD Writer) Raw materials/components Sl. No. Broad component Parts name 1. Casing includes (a) Housing/casing/cover A (Upper plastic cover) (b) Housing/casing/cover B (Lower plastic cover) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e different from the final product obtained as a result of such assembly process. 7. Also, the aforesaid parts/ components were mentioned broadly during the assessment proceedings along with the process notes given for manufacture/ assembly of such products, as appearing on Page No. 2 & 3 of the assessment order and also during the appellate proceedings as appearing on Page No. 9 of the order of the Worthy CIT(A),. A copy of the said process notes of manufacture/ assembly with broad components, which are already on record, are also placed at pages 32 to 34 of the Paperbook attached. Further it is also submitted in this regard that all the products of the assessee firm satisfy the impugned conditions of manufacture as prescribed under the Act, as pointed out in Point No. 5 of our submissions above. Your attention in this regard is drawn to the Table below showing the conditions being fulfilled by the assessee firm with regard to the definition of manufacture for each of the products separately. Characteristics /Products External DVD Writer External Hard Disk Computer laptop Computer Mouse Name/ Nomenclature -Refer table in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. Value addition and increase in value The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. Now, since all the four aforesaid products produced/manufactured by the assessee firm clearly satisfy the tests laid down in the definition of manufacture given in the Income Tax Act and even tests ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vities using the toolkits/ equipments& computer for testing & soldering and did not require immediate supervision from the partners in this regard and, therefore, the partners could be stationed in Delhi, taking care of the marketing activities for the products instead of production during the relevant assessment year. iii. Further the lack of qualified and sufficient personnel as alleged by the AO is completely not justified, where the sales of the assessee firm have not been doubted and accepted, as is and similarly, no doubts have been raised on the production facility of the assessee firm, thereby indicating that the production has, infact, taken place at the rented premises of the assessee firm and therefore there without finding any defect in the books of account, the allegation of lack of employees and qualified personnel is not justified, where infact the partners themselves could have been a part of the production team. Also, even the' Worthy CIT(A) has resorted to reiterating the opinion of the AO, in this regard without bringing on record any material in this regard. The Worthy CIT(A) has also alleged that the assessee has not been able to prove his....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... article distinct in name, character and use hence 'manufacture' eligible for deduction under s. 80-1B-Finding arrived at by Tribunal is a finding of fact not giving rise to any substantial question of law" CIT vs. JACKSON ENGINEERS LTD. (2012) 341 ITR 0518 (DEL HC) CIT vs. CHIRANJJEEVI WIND ENERGY LTD. (2011) 333 ITR 0192 (Madras HC)at page 38 of the Judgment Set ACIT vs. DIXON TECHNOLOGIES (I) (P.) LTD. (2013) 35 CCH 0484 (Del Trib) CIT vs. TATA LOCOMOTIVE & ENGINEERING CO. LTD. (1968) 68 ITR 0325 (BOM)ar page 41 of the Judgment Set From the above it can be clearly inferred that assembly of goods infact amounts to manufacture, as held in the various judgements above. The Ld. AO and the worthy CIT(A) have completely overlooked the said facts and without bringing any relevant material on record, have made such heavy disallowances in the case of the assessee, which is both bad in law and against the facts and circumstances of the case. 10. Further reliance in this regard is placed on the following Judgements of the Apex Court and jurisdictional ITAT, in support of the fact that the process undertaken by the assessee amoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to manufacture : a) India Cine Agencies: Computer Graphics Ltd. Vs. CIT, (2009) 308 ITR 98 (SC) b) Vijay Ship Breaking Corporation & Others Vs. CIT (2009) 314 ITR 309 (SC) c) CIT Vs. M/s Oracle Software India Ltd. (2010) 320 ITR 546 (SC) 3.11 The decision relied upon by the CIT-A in the case of M/s Indican Software Vs. ITO it was submitted is clearly distinguishable on facts. The issue in the facts of the said case was the activity of software production which was held questionable on the basis of the enquires made by the Inspector. In the facts of that case unlike the present case the activity was carried out for only one year and which has been distinguished point wise in the separate tabular synopsis filed separately. In the case of the assessee it was submitted the evidence is discarded on presumption as no such enquiries were made the said activity have been carried on by the assessee in the last two assessment years. 3.12 Reliance was also placed on the meaning of production which has been held to be a term of much wider meaning than the word "manufacture" as considered by the Apex Court in the case of CIT Vs. N.C. Budharaja and Co. [1993] 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct it is clearly a case of change of opinion on same set of facts by the AO and the CIT(A) as no fresh material has been taken on record to vary the conclusions. The past history of the assessee itself has been ignored on an arbitrary reasoning contrary to settled legal principles. The facts in assessee's own case it was submitted have been ignored. Accordingly it was his submission that the necessary relief in accordance with law may be granted to the assessee 4. The Ld. Sr. DR Mr. Manjeet Singh reading through the assessment order and the impugned order submitted that admittedly the claim of the assessee has correctly been denied in view of the fact that there were a mere handful of employees barely qualified with absolutely no visible investment in machinery barring took kits/ laptops / computers etc. The absence of heavy machinery or any other major electrical expenditure are facts which come in the way of claim of carrying out the so called manufacturing activity. It was his submission that this was a mere assembly activity and not a manufacturing activity. The taxable income it was submitted has rightly been enhanced by the CIT(A). The decision relied upon by the CIT(A) it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om supplier. 3. Physical inspection of Memory on receipt from supplier. 4. Serial Nos. of all the components. 5. Testing of barebone computer. 6. Testing of Hard Disk Drives. 7. Testing of Memory. 8. Installation of Memory inside the barebone computer. 9. Installation of Hard Disk Drive inside the barebone computer. 10. Loading of operating systems/required softwares. 11. Testing of printer and other devices on the computer. 12. Testing of all the ports. 13. Branding. 14. Testing of Software compatibility. 15. MRP stickers and labelling. 16. Cleaning and packing. Kinko Computer Industries Manufacturing process of external Hard Disk Drives : 1. Physical inspection of casing. 2. Physical inspection of drives. 3. Testing and examination of the casing. 4. Testing and examination of the drives. 5. Testing and inspection of USB ports. 6. Testing of USB cables. 7. Inspection. 8. Assembly of drives in casing. 9. Final testing. 10. Final inspection. 11. MRP sticker and labeling. 12. Cleaning and packaging. 13.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the litmus test "'manufacture" as defined by the Income tax Act, due to the very basic reason that nomenclature, character and use of the products namely Hard Disc and DVD Writer remains the same. The only difference made at the premises of the assessee is that the Hard Disc /DVD Writer is put into a casing to be attached to a USB Drive. The Hard Disc or the DVD Writer has the same function or use even without the casing also and the casing merely provides an outer shell or packing to protect it from external factors. Merely putting the HDD/DVD Writer into a casing does not amount to manufacture/production by any stretch of imagination. Both the items are i.e. Hard Disc & External Casing are easily available in the open market and various online sixes. Any layman can purchase the two and put she functional disc into the casing without using even a screw driver. (ii) Dissecting the claim of other activities being undertaken by the assessee in the process like testing, inspection etc. the facts as depicted in the balance sheet and P&L of the assessee and other documents submitted during the course of assessment does not prose the same. As per the schedule of fixed assets....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assembly of various parts. These steps involved installation of memory inside a barebone computer, installation of hard disk drive and loading operating system on the computer respect of laptops and assembly of drive in casing out of the various steps listed in assembly of hard disk drives and external USB DVD writers. The question that follows is that has the appellant discharged the onus on him to establish that he is carrying on manufacturing and does he have the resources and manpower to carry out a manufacturing as claimed by the appellate. A perusal of the material on record showed very glaring facts which could not be ignored. The name are listed as under: a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P & L account include; only purchase cost and cartage inwards cost. c. No expense on manufacturing has been debited to the P & L account. d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no manufacturing has been carried out by you. 6.1.3 Through the show cause notice for enhancement of incorr e u/s 251 of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... facts show that the appellant is having no person qualified as software professionals or hardware professionals or professionals with past experience to undertake the manufacturing as claimed by the appellant. The meager salary and the education qualifications raised serious suspicion about the qualifications required for discharging the job been undertaken by the appellant No machinery to undertake the manufacturing process or the testing process clearly leads to the inference that the appellant is carrying out no manufacturing as claimed by him. Moreover, as brought out by the assessing officer, the appellant is sing various items from vendors in New Delhi and is selling most of its s to its sister concern situated at New Delhi, the contention of the appellant that the goods were purchased from New Delhi, assembled in HP ani sold back in Delhi does not make much business sense. 5.4 I find on a reading of the above in the light of the decisions relied upon by the assessee before the Bench that the reasoning and conclusion of the assessing officer upheld by the CIT(A) that the order of the CIT(A) on facts cannot be uphold. The decision of the coordinate Bench dated 09/08/2016 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h disallowance. The assessee carried the matter before the Id CIT (A) who in turn confirmed the finding of the Id AO for rejecting the claim of the assessee for deduction u/s 80IA of the Act. Aggrieved by the order of the Id CIT (A) the assessee is in appeal before us. 5.5 In the light of the said Remand the coordinate bench took note of the fact that the said assessee was a partnership firm formed by husband and wife wherein the husband derived income from salary and running business concern in the name of Chopra gas agency the wife was also deriving salary from some filling station. Both the partners on facts were not qualified as software professionals or had any past experience in the said business. The qualifications of the employees and their number also could not justifiably address the claim of software having been produced. The assets were noticed as incapable of being sufficient for software development activity as only one computer was noticed to have been available to the said firm. Accordingly it is seen that the said decision is entirely distinguishable on facts. In the facts of the present case the assessee has a partner namely Mr Sanjay Wadhwa who is a B Tech. En....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n'ble High Court on a challenge posed by the Revenue was ultimately decided in favour of the assessee by dismissing the departmental challenge. Infact at this juncture, it would not be out of place to extract the following words of wisdom pointed out by the Court in the case of Sun Engineering (cited supra):- "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision." 5.8. Accordingly I find that the reliance placed upon the said decision by the Revenue is misplaced. On the contrary, a perusal of the decision dated 3rd of August 2017 of the Apex Court in the case of CIT-V versus M/s Hindustan Petroleum Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....would show that in the facts of the said case the assessee was claiming deduction under section 80 IB for manufacture of motorcycle wheel which involved assembly of RIM; tube; tyre; bearing; drum; spoke; nipple and collar which on assembly resulted in an article of a distinct name and character. Considering the various case laws which were referred to by the parties before the Court the issue was decided by the Court as under:- "11. Considered in this light, factually speaking in the instant case the various parts assembled by the assessee using its machinery results in achieving of a final product. The parts or components utilized by the assessee in its assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to 'manufacture' or production of an article. Therefore, the profit derived from each activity is eligible for the claim of benefit ....