TaxTMI 
TaxTMI 
2014 (7) TMI 1277
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....taking (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: Step 1 : Process of solution: Herbal raw m....
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....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 assessment order. 3. On appeal, the learned CIT(A) held as follows: 1. On the issue as to whether the assessee is in pos....
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....hether 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 establishment expenses of Rs. 18,77,689/-, only Rs. 1,57,715/- was incurred by the assessee and the balance of Rs. 16,10,643/- is borne by M/s. Laila Impex which is evident from the debit notes raised by them. (....
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....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 department that machinery was not installed during FY 2005-06. He referred to para 3.3 of the assessment order and submitted that the claiming fabrication work from three parties could not be cross-verified. Notices u/s 133(6) were returned unserved by the postal authorities. Income-tax Inspectors cond....
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....n 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 decision of ITAT, Mumbai Bench in the case of CIT v. Gebbs Infotech Ltd. [IT Appeal No. 3370 dated 13th October, 2010] for this proposition. He emphasised that the direction given by the CIT(A) to the AO to compute profit on the turnover done through job work and exclude the same while computing the eligible deduction u/s 10B, is legal....
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....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 authorized to serve the notices, could not serve the notice and gave a report that there are no such parties and no such addresses. The appellant had contended that the due to long afflux of time of about 4 years, the fabricators being small contractors might have closed their business and moved away. However, subsequently confirmation letters were filed by 3 persons representing the above labour contractors. An extract of letter received from Sri K.L.V. Ramana, file....
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....d 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 machinery has been installed and utilized during the year. This apart, there are other evidences, which clearly go to show that the machinery has in fact been purchased and utilized during the year, such as the following : (i) Inspection report dated 06.10.2005 from Superintendent of Central Excise & Customs, Range-IV, Vijayawada, addressed to the Development Commissioner, VSEZ, confirming the installation and utilization of the machinery in the premises of the appellant at Shed Nos.6 and 7, Phase-III, Jawahar Autonagar, Vijayawada. An extract of the ....
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....w: (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 Nutraceuticals, a 100% Export Oriented Unit at Sy No.484, D.No.54-11-9, Phase-/!/, Shed No.6 & 7, Jawahar Authonagar, Vijayawada-530 007 and additional location at Sy. No.1S1/4B, 181/3, 181/2, JRD Tata industrial Estate, Kanuru Village, Autonagar, Vijayawada-7, manufacturers and exporters of Herbal Extracts had commenced production on 05.10.2005 and effecting exports. This is issued to the unit as desired to further submit the same to Income Tax Authorities : Sd/- (B. Raja Babu) Asstt. Development Commissioner To M/s. Laila Nutraceuticals, 40-15-14, Brindavan Colony, Vijaya Wada-520 010' (ix) Certificate of Licence to manufacture Ayurvedic Drugs received from Department of Ayurveda, Yoga & Naturopathy, Unani, Siddha ....
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....re 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 been installed and manufacturing activity commenced on 5th October, 2005. (c) The District Development Commissioner of Visakhapatnam Special Economic Zone certified commencement of manufacturing activity on 5th Oct. 2005. (d) Out of the total machinery of Rs. 1,07,31,482/-, machinery to the extent of Rs. 99,77,805/- was purchased by issue of account payee cheques and the AO or the DIT (Inv.) have not raised any questions in this regard. (e) The factum of purchases are not in dispute. On the balance of Rs. 7,53,680/- confirmation letters were filed before the DIT (Inv.) (f) No part of the machinery from the sister concern M/s Laila Impex was transferred to the assessee as evident from the examination of the balance sheets. (g) All the six steps involved in the manufacture of herbal extracts as listed out at para 3.2 of the assessment order at pages....
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....erned 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 manufacturing process of the appellant involves the following stages: (a) Process of solution (b) Process of concentration (c) Process of Drying (d) Process of Pulvarisation (e) Process of Sieving (f) Process of packing 14.5 Each of the above processes have been dealt with in detail in the written submissions filed by the appellant, which have been reproduced in the preceding paras. The first stage of the manufacturing process is carried out by M/s. Laila Impex, on job work basis. The remaining 5 stages are carried out by the appellant in its premises. 14.6 Unless, all the activities in the first 5 stages are carried out, the manufacture of the finished product cannot be said to be completed in the appellant's case. Even the 6th stage of packing in the appellant's case is a necessary adjunct to the process of manufacture, in as much, the packing would have to be specialized keeping in view the need for long preser....
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.... to total manufacturing cost, the entire manufacturing cost including raw materials, chemicals etc., should be taken into account. In this context, as mentioned above, only the first stage of manufacturing i.e. the 'process of solution' has been given on job work to M/s. Laila Impex and all the other stages of manufacturing process, including the process of concentration, process of drying, process of pulverizing, process of sieving and process of packing are done by the appellant itself. However, as held by various judicial pronouncements mentioned in the preceding paras, the appellant is not precluded from carrying out the part of the stage of manufacturing through job work. 14.11 Apart from the above, the appellant contended that the power and fuel expenditure has larger component of diesel, which is mandated by frequent power cuts, necessitating use of generator for manufacturing activities. Though, the Assessing Officer has commented on this issue in the assessment order, he has not brought out any evidence to show that generator has not been utilized for manufacturing processes by the appellant. Therefore, since the generator expenditure has been incurred exclusivel....
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.... what was got done by the assessee by (of) loading certain works to job work contractors, is an intermediate product. He contends that what was given by the job work contractors was an end product by itself. He submits that the product is a module by itself and not a part of overall module. On a query from the Bench, he submitted that in a software industry the full work for development of software is undertaken by one developer. He relied on the order of the AO and submitted that the AO's finding that the assessee should get proportionate deduction is to be upheld. 16. The learned counsel for the assessee, on the other hand, submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis. He contended that the software development cycle consists of more than 20 different parts and only part of the software development was outsourced. He relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Penwalt India Ltd. [1992] 196 ITR....