TaxTMI 
TaxTMI 
2014 (7) TMI 1277
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....nership firm and 100% Export Oriented Undertaking (EOU), engaged in the business of manufacturing and trade of biological products, pharmaceuticals, ayurvedic products and herbal extracts. The original assessment for AY 2006-07 was completed on 17/12/2008, allowing deduction u/s 10B of the Act. Subsequently, survey operation u/s 133A of the Act was carried out by Dy. Director of Income tax (Inv.), Vijayawada and based on the findings during the survey, the assessment was reopened u/s 147 of the Act, after duly recording the reasons therefor. Thereafter, the reassessment was completed on an income of Rs. 23,03,43,847/- after denying the exemption claimed u/s 10B of the Act. The main reasons for denying deduction u/s 10B of the Act, was that a) machinery was not installed during the FY 2005-06 relevant to AY 2006-07, b) As some part of the manufacturing activity was given on job work to M/s Laila Impex, that the AO doubted the claim of the assessee that it is carrying out manufacturing activity within the premises of the assessee and c) The assessee is not carrying out any manufacturing activity. 2.1 The manufacturing process of the appellant firm involves the following six steps:....
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.... (a) That out of the manufacturing expenses of Rs. 4,65,34,414 a sum of Rs. 4,35,04,675 was incurred by Laila Impex and this works out to 96.56% of the total manufacturing expenses and that 90.4% of the total manufacturing expenses is paid to Laila Impex towards job work charges. (b) Out of manufacturing & establishment expenses of Rs. 16,10,643 a sum of Rs. 1,57,715 was towards monthly salaries of the assessee firm and the balance was borne by Laila Impex. (c) Out of power & fuel of Rs. 65,28,127 a sum of Rs. 54,95,037 was towards diesel for generators and only the balance of Rs. 10,38,090 was towards power bills. (d) Out of the six stages, only the first two stages can be considered as manufacturing and out of this stage 1 is carried out by Laila Impex. 2.5 Thus, the DDIT (Inv) was of the view that the appellant firm is not entitled to claim exemption u/s 10B of the Act and the same thing was informed to the assessing officer in his report addressed to the assessing officer. 2.6 The Assessing Officer followed this report of the DDIT(lnv.) in his order. The finding of the DDIT(lnv.) became the finding of the AO in the asse....
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....fil the conditions laid down u/s.10B(2) of the Act. (d) The learned CIT(A) has erred in presuming that the machinery purchased was new even though it was not known whether the machinery purchased was new or old. (e) The learned CIT(A) has erred in accepting the contention of the assessee that the labour contractors are available and accepting the confirmations submitted by the labour contractors through the assessee, who are not available to the Department for serving the notices. (f) The learned CIT(A) has erred in allowing exemption u/s.10B by concluding that machinery was installed even though the assessee has not installed machinery fully during the first year of the manufacturing i.e. AY 2006-07 and purchased further machinery in the subsequent years. (g) The learned CIT(A) has erred in accepting the contention of the assessee that Superintendent of Customs & Central Excise has submitted a report to VSEZ that machinery was installed even though VSEZ has denied that no such report was received from Department of Customs & Central Excise. (h) The learned CIT(A) failed to note that out of manufacturing est....
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....tal claim of Rs. 23,03,43,847 made by the appellant. 6. The learned Commissioner of Income Tax (Appeals) is not justified in holding that the appellant could not prove that the job work was carried out under the supervision of the appellant. 7. The learned Commissioner of Income Tax (Appeals) having held that that the salaries of the persons supervising the job work is to be allowed, could not have in the same breath held that the job work was not supervised by the appellant. 8. In any event, the learned Commissioner of Income Tax (Appeals) is not justified in disallowing the exemption u/s 10B with regard to 21.27% of the turnover in as much as there is no provision in the Act to divide to turnover on sale of finished goods in the manner done by the learned Commissioner of Income Tax (Appeals). 9. The learned Commissioner of Income Tax (Appeals) having held that the appellant fulfilled the requisite conditions of S.10B, ought to have fully allowed the exemption u/s 10B." 7. The learned DR Shri K.V.N. Charya referred extensively to the order of the AO and submitted that consequent to survey, it came to the notice of the ....
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....earned CIT(A)'s order and submitted that percentage of job work charges in total manufacturing expenses comes to 21.27% and, thus, the conclusion of the AO that no manufacturing activity was carried out by the assessee is factually incorrect. 9.1 He relied on the following decisions for the proposition that getting a part of manufacturing done on job work basis does not in any way affect the claim of deduction u/s 10B: 1. ITO v. Techdrive India (P) Ltd. [2010] 124 ITD 249 (Delhi) 2. CIT v. Continental Engines Ltd. [2011] 338 ITR 290 3. Taurus Merchandising (P.) Ltd. v. ITO [2012] 138 ITD 204 10. Referring to the issue of whether there is manufacture, he submitted that the AO has accepted Step 1 & Step 2, out of six stages as manufacturing activity. He argued that other 4 steps are also to be considered as manufacturing process. 11. On the assessee's appeal, the learned counsel submitted that reduction of the eligible deduction claim u/s 10B on the ground that part of the work is done through job works and hence the profit attributable to such job work is not eligible for deduction is not permissible. He relied on the dec....
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....nk Cheque No. 1 Shreyans Metal (India) 37 16.05.2005 7,50,589.00 HDFC, Vja 448312 2 Javpee Steel 3194 08.06.2005 5,57,700.00 HDFC 448306 3 Padmini Steels 7 01.06.2006 10,64,596.00 HDFC 448307 4 Steel Fab 368 23.07.2005 6,68,304.00 HDFC 448315 5 S.R.Industries 36 26.03.2006 16,31,250.00 HDFC 660058 6 S.R. Industries 37 28.03.2006 11,81,250.00 HDFC 555987 13.2. As seen from the above, the machinery has been purchased on various dates, including as early as on 16.05.2005. There have been regular purchases of machinery throughout the year. As per the invoices, there is no indication that the machinery is a used or old machinery and therefore, has to be presumed only as a new machinery. 13.3. In the assessment order, the Assessing Officer has stated that information u/s.133(6) of the Act was called for by the DDIT (Inv.), dated 16.10.2009 from 3 labour contractors i.e. Praveen Engineering Works, Raghavendra Engineering Works and Ramana Engineering Works, who were partly involved in fabrication of machinery. The Inspector who was aut....
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....lu and Mr. G. Chittibabu, confirming their roie in installation of machinery in the premises of the appellant. The concerned letters are in the assessment folder. Though, the parties have clearly confirmed that they have carried out the labour works and also provided their mobile numbers, yet, no further enquiries were done by the Assessing Officer, who merely relied on the report of the DOIT (Inv.), which questioned the installation of machinery on the ground that letters written u/s. 133(6) of the Act to three of labour contractors, were 'returned unserved.' 13.5 As mentioned above, the payments for purchase of machinery have been made through banking channels and the machinery have been purchased at various periods of time, right from the first quarter of the financial year. It is unlikely that the machinery which has been purchased over the period would have been kept unutilized and no activity taken up thereon. Further, it should be noted that confirmation letters from machinery suppliers have been filed and no doubt has been expressed in the assessment order as regards their genuineness. In absence of contrary evidence, it can be reasonably presumed that the ....
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.... herbal extracts under EOU scheme dated 22/03/2005 from Development Commissioner, VSEZ. (iv) Central Excise Registration certificate dated 06/10/2005. (v) Inbond manufacturing sanction order dated 06.10.2005 from the Asstt. Commissioner of Customs and Central Excise, Vijayawada. (vi) Certificate of Importer-Exporter Code (IEC) Number dated 09.09.2005 from Development Commissioner, VSEZ. (vii) VAT Registration Certificate w.e.f. 01.04.2005 from Commercial Taxes Department, Government of Andhra Pradesh. (viii) Letter dated 20th Oct., 2009 from Asstt. Development Commissioner, VSEZ, certifying the commencement of production on 5th Oct., 2005. An extract of the said letter is given below: (Emphasis ours) 'Government of India Ministry of Commerce & Industry Office of the Development Commissioner Visakhapatnam Special Economic Zone Administrative Building, Duvvada Visakhapatnam - 530 046 A. P. (INDIA) Ph: 0891-2587382 Fax:0891-2587352 E-mail: [email protected] No. 8/EOU/322/VSEZ/2009/0631 dt. 20th Oct., 2009 To whom it may concern This is to certify that M/s. Laila N....
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....chinery installed in the appellant's premises is not a new machinery. In view of the same, the Assessing Officer is not justified in making contextual reference to the appellant by his observation in page 9 of the assessment order that "100% EOU should be a new business unit/entity and not a clone of existing business. In other words, it should not be like old wine in new bottle.' 13.8. In view of the above, I would hold that the appellant has installed machinery and commenced operation during the previous year relevant to the assessment year 2006-07 and the plant & machinery installed is a new plant & machinery, which has not been hitherto utilized." 15. We agree with these factual findings of the learned CIT(A). These factual findings are so clear that we need not repeat or further elaborate on them. Any how we enumerate some of them. (a) There are many licenses issued by the Governmental authorities in the name of the assessee firm and the agencies confirm installation and commencement of manufacturing. (b) Inspection was conducted by the Asstt. Commissioner of Central Excise and Customs and the machinery is certified as having b....
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....s contravened the provisions of clause (a)(ii) of Chapter 6.14 of the Foreign Trade Policy, which states that the units may contract up to 50% of overall production in value terms in Domestic Tariff Area (DATA) with permission of Customs Authorities. The appellant has contended that clause (b)(iii) of Chapter 6.14 of FTP is applicable in its case and not clause (a)(ii) of FTP as held by the Assessing Officer. 14.2 Clause (b)(iii) of Chapter 6.14 of FTP reads as under : (iii) Subcontracting of both production and production processes may also be undertaken without any limit through other EOU/EHTP/STP/SEZ/BTP units, on the basis of records maintained in unit. 14.3. In course of the appeal proceedings, the appellant has filed certificates of both itself and M/s. Laila Impex to the effect that they are recognized as 100% EOUs and has also stated that complete records in both units regarding the job work are maintained, duly verified by the concerned authorities of Central Excise/SEZ, from time to time. Therefore, I am in agreement with the contention of the appellant that sub-clause (b)(iii) of Chapter 6.14 of FTP are applicable in its case. 14.4 The....
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.... Packing Materials 0.58 0.00 0.58 Fuel and Power 0.58 0.07 0.65 Manufacturing Expenses 4.51 0.14 4.65 Manufacturing Establishment 0.16 0.02 0.18 Total 19.56 0.23 19.79 % of reimbursement 1.16% Job work charges included in Mfg. Expenses 4.21 % of Job work charges in total Mfg. expenses 21.27% 14.10. While working out percentage of job work to manufacturing expenses, it would be logical to include entire manufacturing cost, comprising of raw materials, chemicals, packing material, fuel and power, manufacturing expenses and manufacturing establishment, since all these expenditure constitute the actual manufacturing expenditure incurred. This is all the more required since the entire raw material, chemicals and packing material and part of the other expenditure is directly incurred by the appellant itself. The raw material and chemicals are purchased by the appellant and then later given for job work. Therefore, it would stand to reason that while working out percentage of job work expenditure to total manufacturing cost, the entire....
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.... result, appeal of the revenue is dismissed. 22. We now take up the assessee's appeals. 23. On the issue of directions of the learned CIT(A) to the AO to compute the profit of 21.27% of the turnover, as the same is attributable to the outsourcing of manufacture through job works and, then to exclude such profits from the profits eligible for deduction u/s 10B, we hold that the same is contrary to law. No such exclusion is contemplated in the Act. We are supported by the propositions laid down by the Mumbai Bench of Tribunal in the case of Gebbs Infotech Ltd. (supra), wherein it was held as follows: 'The ground No. 3 is that " on the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the AO in not allowing deduction u/s 10B of the Act on proportionate amount worked out at Rs. 1,74,34,738/-." 15. Coming to ground No. 3, the AO observed that the payments of Rs. 13,69,950/- was made to certain companies on account of job work and concluded that as the assessee is not a manufacturer to that extent, the exemption u/s 10B should be worked out on proportionate basis. The learned DR submitted that what was g....
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..... A software product, contains within its numerous sub-software programmes which are integrated. On these facts we uphold the following finding of the CIT(Appeals): "As has been stated in the earlier part of the order, deduction u/s 10B is to be allowed on such profits and gains which are derived from the undertaking and which fulfils different parameters. It goes without dispute in the case of the appellant that the unit is a 100% export unit and the profits and gains derived pertain to such exports. It is not the requirement of the section that the deduction which have been claimed in the case of an assessee is not admissible where a part of the software development programme has been carried out as job work by other parties. It is not the case of the A.O. that the deduction has been claimed by the appellant on the export of software which has been manufactured by other independent concerns and entities and that the appellant has included the export proceeds generated out of such software programmes which do not belong to it and on which it had claimed exemption u/s 10B of the I.T. Act. No evidence has been brought on record by the A.O. in this regard. The fact is that t....