TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 423
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....ommissioner of Income Tax OSD 2(1) and erred- 1.1 in not allowing the Appellant a deduction under Section 80IB in respect of profits earned by the Appellant from an undertaking set up in an eligible backward district on the ground that the activity of the Appellant did not amount to either "manufacture" or "production". 1.2 in not appreciating that the Appellant was actually manufacturing products which were commercially distinct and different from the raw materials used in an integrated manufacturing undertaking. 2.1 In denying the Appellant, a Supporting Manufacturer, deduction under Section 80HHC only on the ground that the Export House, Allanasons Ltd, which has issued a Disclaimer Certificate under Section 80HHC was not entitled to any deduction under Section 80HHC. 2.2 in not appreciating that the deduction under Section 80HHC to the Appellant is allowable in its capacity as a Supporting Manufacturer for which separate sub-section (1A), (3A), (4A) and explanation clauses (d) and (e) are applicable and that the proviso to sub-section (1) can only apply to and limit the amount of deduction In case of an Export House but cannot affect the eligibility of the Appellant....
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.... assessee is not admissible as the activity of the assessee did not amount to "manufacturer" or "production" of goods. Thus, the Assessing Officer denied the deduction under section 80HHC as well as deduction under section 80IB. On appeal before the ld. CIT(A), the action of Assessing Officer on deduction under section 80HHC was confirmed. However, the alternative claim under section 80IB was not adjudicated. Thus, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us. 4. We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. Ground No.1 relates to deduction under section 80IB. The ld. AR of the assessee submits that the AO disallowed the deduction under section 80IB holding that the assessee's activity did not amount to 'manufacture' or 'production' of goods by relying upon the decision of Hon'ble Supreme Court in CIT vs. Relish Foods (237 ITR 59). The ld. AR further submits that deduction under 80IB(v) is available to assessee on Profit & Gain derived from an Industrial Undertaking situated in backward are....
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....tivities in the chiller and the control postmortem changes during the course of these activities complete the process of conversion of muscles in the Carcasses into meat. The chilled Carcasses are subject to three different manufacturing processes with deboning, for the production of (i) Frozen Boneless Meat, (ii) Chilled Vacuum Packed Meat and (iii) Minced Meat. During the deboning activity Costal Cartilages which are small bent bones like cartilages from ribs, Shoulder Cartilages are collected. The Cartilages collected as cut into small pieces mechanically and passed through various enzymatic actions and acid treatments by controlling pH. The ld. AR explained that by passing through all the aforesaid activities, the assessee is actually producing various products which are commercially radically different from the raw material used and which are actually sued and consumed in different industries. A new and different and distinctive names, characters and uses have emerged as a result of the above activities. 5. The ld. AR submits that the word "manufacture" or "production" are not defined under the Income-tax Act. However, the activities carried out by assessee are accepted as "....
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....it is an action which brings some change or alteration of the goods or material subjected to the act of processing. 8. The ld. DR for the revenue in support of his submission relied upon the decision of Hon'ble High Court of Kerala in Olam Exports (India) Ltd. vs. CIT [2009] 184 Taxman 373 (Kerala) and the decision of Hon'ble Delhi High Court in Great Eastern Exports vs. CIT [2011] 196 Taxman 145 (Del.). 9. In rejoinder submission, the ld. AR of the assessee submits that the Hon'ble Bombay High Court in Associated Capsules (P.) Ltd. vs. DCIT (supra) has considered the decision of Kerala High Court in Olam Exports (India) Ltd. (supra) and decision of Delhi High Court in Great Eastern Exports vs. CIT (Supra). 10. We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer disallowed the deduction under section 80IB holding that the assessee's activities undertaken at industrial unit at District-Unnao, State of U.P. does not fall in the category of 'manufacturing' or 'production'. The ld. CIT(A) while deciding the appeal held that in the entire process involved in converting Carcass into meat, there is no di....
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....ol postmortem changes during the course of these activities complete the process of conversion of muscles in the Carcasses into meat. We have also noted that chilled Carcasses are subject to three different manufacturing processes with deboning, for the production of (i) Frozen Boneless Meat, (ii) Chilled Vacuum Packed Meat and (iii) Minced Meat. During the deboning activity Costal Cartilages which are small bent bones like cartilages from ribs, Shoulder Cartilages are collected. The ld. AR explained that by passing through all the aforesaid activities, the assessee is actually producing various products which are commercially radically different from the raw material used and which are actually sued and consumed in different industries. A new and different and distinctive names, characters and uses have emerged as a result of the above activities. The Assessing Officer discarded the contention of assessee without discussing the production activities at different stage undertaken by the assessee. We have further noted that the facts brought in our notice and different activities undertaken by assessee are not disputed by ld. DR for the revenue, while replying the submission of ld. ....
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....ing than are one and the same commodity. 14. The Hon'ble Supreme Court in CIT vs. Emptee Poly-Yarn (P.) Ltd. (supra) held that Partially Oriented Yarn (POY) by using Thermo Mechanical Process, which converts POY into texture yard amounts to manufacture in term of section 80IA. The Hon'ble Apex Court further held that the definition of the word 'manufacture' is made explicit by Finance (No. 2) Act, 2009 which states that 'manufacture' shall, inter alia, mean a change in bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Applying this definition to the facts of the present case, it may be mentioned that the above thermo-mechanical process also bring about a structural change in the yarn itself, which is one of the important tests to be seen while judging whether the process is manufacture or not. The structure, the character, the use and the name of the product are indicia to be taken into account while deciding the question whether the process is a manufacture or not. 15. The Hon'ble Apex Court in Aspinwall and Co Ltd Vs CIT (supra) held that the process is manufacturing process wh....
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....he end customer. (d) The word 'production' has a wider connotation in comparison to 'manufacture', and any activity which brings a commercially new product into existence constitutes production. The process of bottling of LPG renders it capable of being marketed as a domestic, kitchen fuel and, thereby, makes it a viable commercial product. 17. The co-ordinate bench of Tribunal in ITO vs. Shri Swasan Chemicals (M) P. Ltd. (supra) held that the assessee who was involved in production of specialized polymer alloys in powder form that were commercially different from polymer granules. The process of production itself involved a number of step and process. The result was that final polymer alloys in powder work not the same as original product. The final product and application in various industries. The raw-material could not be substituted for the final product. The production process resulted not only in qualitative changes but also gave the product a distinct appearance and character which was so recognized in the trade. Hence, production process resulted in a commercially different product having specific characteristic and qualities through a series of steps and....
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....d and appeal filed by revenue was dismissed vide ITA Nos. 5513, 5532 & 5514/Mum/2011 and ITA Nos. 4078, 4167 & 4137/Mum/2011 vide order dated 27.07.2016. 21. The ld. AR further relied upon the decision of Bangalore Tribunal in Shamanur Kallappa & Sons vs. ACIT (23 DTR 269) wherein it was held that the only condition stipulated by legislation is that the same benefit should not be claimed by both the export house and the supporting manufacturer. The pre-condition is that export house should furnish a certificate of disclaimer in respect of export turnover and the amount of deduction allowable to the export house would be accordingly reduced in the specified manner. Similarly, the supporting manufacturer can claim benefit on the basis of disclaimer certificate of export house. The ld. AR submits that the Assessing Officer disallowed the deduction that in case export house is not eligible for deduction and it issues a disclaimer certificate to supporting manufacturer, the supporting manufacturer is not entitled for any deduction. The ld. AR further submits that the assessee has raised additional ground of appeal that assessee is entitled to a deduction under section 80HHC on the pro....
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....sis of disclaimer certificate issued by State Trading Corporation (STC) certifying that it has not claimed deduction on the export of trading goods. The assessee apparently complied the statutorily requirement provided under section 80HHC(1A) it was held that only condition stipulated by the legislation is that the same benefit should not be claimed by both the export house and the supporting manufacture. To ensure the same, it was made a pre-condition that export house should furnishes a certificate of disclaimer in respect of export turnover, and the amount of deduction available to the export house would be accordingly reduced in the specified manner. The decision of Tribunal was upheld by Hon'ble Karnataka High Court in Tax Appeal No. 10/2009 dated 12.01.2015. 25. The case law relied by ld. DR for the revenue in Alom Exports (India) Ltd. (supra) and in Great Eastern Exports (supra) is not helpful to the revenue as both the decisions were considered by Hon'ble jurisdictional High Court in Associated Capsules (P.) Ltd. vs. DCIT (supra) wherein the Hon'ble Court held as under: 21. We have carefully considered the rival submissions as also the decisions of two High Courts, whe....
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....om the business. However, the dispute is in computing the deduction under section 80HHC in view of the insertion of section 80- IA(9) by the Finance Act, 1998. According to the Revenue, section 80-IA(9) mandates that the deduction under section 80HHC has to be computed not only on the profits of the business as reduced by the amounts specified in clause (baa) and clause (4B) of section 80HHC but also by reducing the amount of profits and gains allowed as deduction under section 80-IA(1) of the Act. According to the assessee, even after the introduction of section 80- IA(9), the deduction under section 80HHC has to be computed in the manner specified under section 80HHC on the profits of the business computed under the head 'profits & gains of business or profession' as reduced by the amount set out in clause (baa) of section 80HHC/80HHC(4B) as the case may be and there is no scope for reducing the profits of business by the amount of profits allowed under section 80- IA(1) of the Act. According to the assessee, section 80-IA(9) merely affects the allowability of the deduction computed under section 80HHC so that the combined deduction under sections 80-IA(1) and 80HHC does not exce....
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....uctions that is allowable under other provisions under heading 'C' of Chapter VI-A would be allowed to the extent of profits as reduced by the profits allowed under section 80-IA(1). The second part of section 80-IA(9) does not even remotely refer to the method of computing deduction under other provisions under heading 'C' of Chapter VI-A. Thus, section 80-IA(9) seeks to curtail allowance of deduction and not computability of deduction under any other provisions under heading 'C' of Chapter VI-A of the Act. 30. How to compute deduction allowable under section 80HHC(1) is set out in section 80HHC(3). In the case of a manufacturer exporter, section 80HHC(3)(a) provides that the deduction under section 80HHC(1) has to be computed as per the formula : Profits of the businessx Export turnover Total turnover Clause (baa) in section 80HHC defines the term 'profits of the business' for the purposes of section 80HHC to mean the profits of the business as computed under the head 'profits and gains of business or profession' as reduced by the amounts specified therein. Therefore, in the case of a manufacturer exporter, deduction under section 80HHC(1) is statutorily required to be co....
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....9) uses the words 'shall not be allowed', in our opinion, the section seeks to restrict the allowance of deduction and not the computation of deduction under any other sections under heading 'C' of Chapter VI-A of the Act. 33. Wherever the Legislature intended that the deduction allowed under one section should affect the computation of deduction under other provisions of the Act, the legislature has expressly used words to that effect. It may be noted that sections 80HHD(7) and 80-IA(9A) [presently 80-IA(9)] were introduced by Finance Act, 1998 with effect from 1-4-1999. Section 80HHD(7) provides that the deduction allowed under section 80HHD(1) shall not qualify to that extent for deduction under any other provisions of Chapter VI-A under the heading 'C', whereas, section 80-IA(9A) provides that the deduction allowed under section 80-IA(1) shall not be allowed under any other provisions of Chapter VI-A under heading 'C'. Similarly, in section 80-IC(5), the words used are that notwithstanding anything contained in any other provision of the Act, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or secti....
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....nd not computation of deduction. 37. Strong reliance was also placed by the Counsel for the revenue on the Special Bench decisions of the Tribunal in the case of Rogini Garments (supra) and Hindustan Mint & Agro Products (P.) Ltd. (supra), which are affirmed by the Delhi High Court in the case of Great Eastern Exports (supra). Reliance is also placed on decision of the Kerala High Court in the case of Olam Exports (India) Ltd. (supra) which supports the case of the revenue. 38. We find it difficult to subscribe to the views expressed by the Delhi High Court in interpreting the provisions of section 80-IA(9). In that case, in fact, the Counsel for the revenue had argued (see para 38 of the judgment) that section 80-IA(9) applies at the stage of allowing deduction and not at the stage of computing deduction under other provisions under heading 'C' of Chapter VI-A. It was argued that in the matter of grant of deduction, the first stage is computation of deduction and the second stage is the allowance of the deduction. Computation of deduction has to be made as provided in the respective sections and it is only at the stage of allowing deduction under section 80-IA(1) and also un....
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....her the ratio in case of IPCA Laboratories (supra), the case law relied by ld. DR is also not applicable on the facts of the present case as in the said case. The Hon'ble Supreme Court in IPCA's case (supra), held that the proviso to sub-section (1) of section 80HHC enables the disclaimer to enable the export house to pass on deductions and it in no way reduces the turnover of the export house and computing total income, the entire turnover is taken into account even though there is disclaimer. The Hon'ble Supreme Court further said that even after disclaimer, the turnover has remained the turnover of the export house. Therefore, the ratio of the Hon'ble Supreme Court is that even if an export house gives a disclaimer to the supporting manufacturer, the disclaimed turnover and the result therefrom will have to be considered for the purpose of determining the quantum of deduction under section 80HHC(3)(c). The Hon'ble Supreme Court had to declare the aforesaid law as the assessee export house claimed that the loss arising from export of goods brought by it from the supporting manufacturer should not be. Considered in computing its profits eligible for deduction u....
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....ufactured goods. Sub-s. 3(b) deals with the case where the export is only of trading goods. Thus, when the legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-ss. (3)(a) and (3)(b). It would not be denied that the word 'profit' in s. 80HHC(1) and ss. 80HHC(3)(a) and (3)(b) means a positive profit. In other words, if there is a loss then no deduction would be available under s. 80HHC(1) or (3)(a) or (3)(b ). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-s. (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub-s. (3)(c) states 'profits derived from such export shall'. Then follow (i) and (ii). Between (i) and (ii), the word 'and' appears. A plain reading of sub-s. (3)(c) shows that 'profits from such exports' has to be profits of exports of self-manufactured goods plus profit....
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....ts out of India during the previous year, any goods or merchandise to which this section applies, he will be allowed a deduction of an amount not exceeding 50 per cent of the profits derived from the export of such goods or merchandise. 2. Representations have been received to the effect that the manufacturers of goods or merchandise exported through the export houses/trading houses do not derive any benefit under the amended provisions of s. 80HHC. It has further been represented that if the tax benefit derived by the export house/trading house under s. 80HHC is passed on to the concerned manufacturer, the amount so passed on should be allowed as a deduction in the computation of the total income of the export house/trading house. 3. The matter has been examined by the Board. It has been decided that if any export house/trading house holding a certificate in this regard issued by the Ministry of Commerce for the relevant accounting period passes on to the manufacturer part or whole of the amount of tax benefit derived by the former on account of deduction under s. 80HHC, then the amount of actual payment made to the manufacturer for passing on the tax benefit may, subject to....
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.... shall be reduced by such an amount which bears to the total profits of the export business of the Export House or the Trading House issuing the certificate, the same proportion as the amount of export turnover specified in the certificate bears to the total export turnover of the Export House or the Trading House as the case may be. 28.4 As a measure to extend the benefit provided under sub-s. (1) to the supporting manufacturers, a new sub-s. (1A) has been inserted to provide that where the supporting manufacturer has sold goods to any Export House or Trading House in respect of which the latter has issued a certificate in the prescribed form in accordance with the provisions of subs. (1) read with the proviso, deduction will be allowed in the computation of the income of the supporting manufacturer, of the whole of the profits derived by it from the sale of goods or merchandise to the Export House or Trading House, as the case may be, in respect of which the certificate was issued by the latter. For this purpose : Export House or Trading House has been defined as being the holder of an Export House Certificate or Trading House Certificate as the case may be; the new Expl....
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....any deduction under this section. The certificate issued by the Export House or the Trading House shall be certified by the auditor auditing the account of the Export House or the Trading House under the provisions of this Act or under any law. 28.7 The working of the benefit under this section, as can be shared between a recognised export house or a trading house with the supporting manufacturer, has been illustrated in the example below : Total export earning in convertible foreign exchange of an Export House : 50 crores Net profit from exports at 2% 1 crore Amount of deduction eligible under s. 80HHC(1) 1 crore Export earnings in convertible foreign exchange in respect of purchases made from supporting manufacturer : 50 lakhs Profit from such exports at 2% 1 lakh Purchase price of goods in the hands of Export House in respect of item purchased from supporting manufacturer 45 lakhs Profit to supporting manufacturer on sale to Export House at 10% 4.5 lakhs Case I : Where the Export House does not issue a certificate under proviso to sub-s. (1) of s. 80HHC. 1 crore Deduction allowable to Export House under s. 80HHC(1) Case II : &nb....
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....t under the Act. Moreover in the present case the Export House is STC, an organization being the extended limb of the Government created for the purpose of facilitating, promoting and encouraging exports and not only for the purpose of profit motive." 27. The aforesaid decision of the Tribunal has been affirmed by Hon'ble Karnataka High Court. The decision of the Hon'ble Bombay High Court in Associated Capsules (P) Ltd (supra), wherein the simultaneous deductions under section 80IB and 80 HHC was allowed and the contrary decisions of Delhi High Court in Great Eastern Export (332 ITR 14) has been referred by Hon'ble Apex Court for larger bench on 10th December 2015 in ACIT Vs Micro Labs Ltd (380 ITR 1). This fact was confronted with ld AR for the assessee and was asked if any decision has rendered by Hon'ble Supreme Court on the reference made to larger bench till now. 28. The ld. AR for the assessee submitted that the Hon'ble Apex Court has not stayed the operation of decision of the Hon'ble Bombay high Court in Associated Capsules (P) Ltd (supra), which is binding precedent on us. It was further brought to our notice that the Hon'ble Bombay High Court while considering the sim....