TaxTMI 
TaxTMI 
2021 (5) TMI 466
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....esponse to the notices, the assessee furnished information and produced the relevant documents. 2. Eventually, on 30.12.2011, the Assessment Officer did the following: (a) Disallowed expenditure of Rs.12,29,25,049/- under section 14A of the IT Act, read with Rule 8D of IT Rules; (b) Declared that the assessee was ineligible for deduction of expenditure incurred on 'Scientific Research and Developments' (R&D) under section 37 of Act. So, the AO disallowed the expenditure of Rs.1,94,55,376/- and added it back to the profit and loss account; (c) Following the pattern of assessment for AY 2006-07 regarding the same assessee, the AO disallowed the commission payment. As a result, Rs.9,88,29,729/- was added back to the total income; (d) Rs.1,55,76,549/- was added back to the total income. It was on account of demurrages the assessee paid to a shipping company in Pakistan; (e) The assessee claimed as expenditure education cess and fringe benefit tax, totalling to Rs.19,72,00,814/-. But that was disallowed. (f) The assessee claimed deductions under section 10B of the Act for its three EOUs, totalling to Rs.4,51,27,84,122/-. But the A....
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....nd loss account; Deleted the addition of expenditure on disallowance of expenditure on R & D. (c) Following the pattern of assessment for AY 2006-07 regarding the same assessee, the AO disallowed the commission payment. As a result, Rs.9,88,29,729/- was added back to the total income; Confirmed the disallowance of commission paid to non-resident agents. (d) Rs.1,55,76,549/- was added back to the total income. It was because of demurrages the assessee paid to a shipping company in Pakistan; Confirmed the disallowance of demurrage payment u/s. 40(a)(i) of the Act (e) The assessee claimed as expenditure education cess and fringe benefit tax, totaling to Rs.19,72,00,814/-. But that was disallowed. Confirmed the disallowance of education cess. (f) The assessee claimed deductions under section 10B of the Act for its three EOUs, totalling to Rs.4,51,27,84,122/-. But the AO disallowed the benefits claimed by the assessee for all the three units. Confirmed disallowance of deductions u/s.10B regarding the three EOUs. (g) The foreign remittances of Rs.57,80,379/- (sale proceeds) relating to 100% EOU of Assessee's Amona Division was not received wit....
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....tly directed the AO to restrict the open market right of the iron ore to average purchase value by applying section 10B (7) read with section 80 IA (8) of the IT Act though there are differences in grade/quality and though it was not at arm's length price? (IIa) Is the Tribunal right in not considering pro rata overhead costs in determining profits from EVUs? (III) Has the Tribunal correctly deleted the disallowance of Rs.12.29 crore under section 14A of the IT Act in accordance with Rule 8D of IT Rules as held by the Mumbai Special Bench of the Tribunal in ITO v. Daga Capital Management Pvt. Ltd. (2009) 117 ITD 169? Arguments: Appellant-Revenue: 6. Ms. Linhares, the learned Standing Counsel for the Revenue, to begin with, has drawn our attention to the expression "manufacture" as defined in the SEZ Act, 2005. According to her, the ITAT (Tribunal) has erred in holding that processing itself amounts to "manufacturing" of iron ore; what has been manufactured must be a distinct commodity. To supplement her submissions on what amounts to manufacturing, Ms. Linares also points out that the Assessee has not brought into existence a new and distinct object or article by usi....
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....la has submitted that the conversion of tailings or making crude run of iron ore into marketable end-product- that is, processing crude ore into lumps or fines-does amount to production or manufacture. According to him, Tribunal has neither misunderstood nor misinterpreted Chowgule. In other words, Chowgule deals with one facet of production, whereas the Assessee's processing of iron ore is much more elaborate, involving various other steps, too. So what the Assessee does in the three Units is more than mere processing; it is production, which is synonymous with manufacturing. Even the chemical combination, in that process, changes. 13. According to Shri Pardiwala, the Assessee's units do more than mere blending. The run of iron ore used as the raw material has no commercial application. On the other hand, the finished product-the lumps or fines-does have commercial value, for that has a different chemical composition. That is, what comes out is a new product. Then, the learned counsel has taken us through a few paragraphs of the Tribunal judgment, besides drawing our attention to certain precedents. 14. On the second substantial question of law, the learned counsel reckons t....
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....ning newly established 100% export-oriented undertakings. This section grants a deduction of the profits and gains derived by a hundred per cent. export oriented undertaking (EOU) from the export of articles or things or computer software. The nature of this deduction is very similar to that under section 10A. The deduction is granted for ten years from the assessment year relevant to the previous year in which the undertaking begins manufacture of articles or things or computer software. The approval granted by the Board of Approval as a hundred per cent. It earlier granted a tax holiday for five consecutive years for hundred per cent. export oriented undertakings. By the Income-tax (Second Amendment) Act, 1998, the tax benefit or tax holiday was extended for ten consecutive assessment yea Of course, the entire Rs. section was recast by the Finance Act, 2000, with effect from April 1, 2001, when s 10A was also recast in a similar manner. Thus, the two sections are substantially similar. 19. Factually, the dispute concerns the Assessee's claim of deduction under section 10B of the Act for its 100% export-oriented units at Amona in Goa, at Chitradurga in Karnataka, and at Codli i....
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....Unit, and its Members, along with the IT officials, did visit the Unit. It was to "understand the type of plant & machinery installed at the iron ore Beneficiation plant and also the processes undertaken for production". 25. In the end, the Tribunal has recorded the finding that the nature of activities at Amona plant and Chitradurga plant are similar. Both these units as well as Codli plant are approved as 100% EOU units, for the Assessee has placed on record the necessary Board approvals. For Codli Unit, the approval was given initially for five years; it was subsequently extended. 26. Then, the Tribunal has addressed the issue whether all these units are manufacturing or producing any article or thing. Let us examine the respective spheres of sections 10A, 10AA, and 10B of the IT Act. Section 10A is a special provision dealing with the newly established undertakings in free-trade zone, and so on; section 10AA deals with the newly established units in special economic zones; section 10B deals with the newly established 100% EOUs. 27. Section 10B provides that any profits and gains derived by an assessee from a 100% EOU shall not be included in the assessee's total income....
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....ing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 32. The Tribunal has heavily relied on Chowgule. But the Revenue insists that the Tribunal has misread and misapplied Chowgule's case holding to these appeals. First, this decision was under the Central Sales Tax Act, 1956; second, "manufacturing" was in the context of the definitional dynamics of that Act, not that of the IT Act. 33. In Chowgule, the appellant mines iron ore and blends diverse quantities of ore. These diverse quantities possess different chemical and physical compositions. This blending results in the production of ore of the requisite chemical and physical composition demanded by the foreign purchaser. When the appellant purchased certain items, they wanted lesser sales tax applied because those items of goods were purchased for the use in producing exportable commodity. 34. In the above context, the Supreme Court has examined whether the appellant, in the first place, involves itself in any manufacturing or processing. Section 13 of CST Act allows the Central Government to enumerate goods or class of goods used in "the manufac....
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....et", as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation may [Corrected vide letter No. F.3/79 (Ed. J), dated January 30, 1981] amount to processing of camphor powder as held by the Calcutta High Court in Om Prakash Gupta v. Commissioner of Commercial Taxes [16 STC 935 (Cal HC)]. What is necessary in order to characterise an operation as "processing" is that the commodity must, as a result of the operation, experience some change". 36. On facts, Chowgule h....
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....y but, instead, is recognised as a new and distinct article that a manufacture can be said to take place." 40. Does the processing of the original commodity bring into existence a commercially different and distinct commodity? In fact, Pio Food Packers has answered that question affirmatively. If we interpret section 2 (29BA) in the context of the case-holdings of both Chowgule and Pio Food Packers, the inevitable conclusion is that for the purposes of Income Tax Act, both 'manufacture' and 'process' are synonymous. 41. In Saraswati Sugar Mills v. Haryana State Board (1992) 1 SCC 418, the Supreme Court has held that the essence of manufacturing is changing one object into another for making it marketable. 42. In Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise 157 ELT 393 (SC), the question was whether cutting of marble blocks into marble slabs amounted to manufacture under the Central Excise Act. In ITO v. Arihant Tiles and Marbles (P) Ltd. (2010) 2 SCC 699, the Supreme Court has noted that in Aman Marble Industries the question concerned "manufacture" but not "production". It has further noted that in Arihant the issue required the determination of what "p....
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....re". 47. In CIT v. Fateh Granite (P) Ltd. 314 ITR 32, this Court interpreted the unamended section 10B of the IT Act. It has held that the expression "manufacture" or "production" are different expressions and the word "production" has a wider meaning. The word "production" under section 10B, being analogous to the expression in section 80IB, will have to be given a wider meaning. The only difference between section 80-IB and section 10B, according to Fateh Granite, is that section 10B applicable to a 100 per cent. export oriented unit, whereas section 80-IB can be regarding any unit. In our opinion, therefore, the expression "production" will have the same meaning as in Sesa Goa Ltd.[2004] 271 ITR 331 (SC), and consequently, the question framed is devoid of merits. 48. For the reasons mentioned above, we hold that on the first substantial question of law, the Tribunal has rightly rendered its findings and those findings require no interference. Second Substantial Question Of Law: (II) Has the Tribunal correctly directed the AO to restrict the open market right of the iron ore to average purchase value by applying section 10B (7) read with section 80 IA (8) of the....
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....ting the profits and gains of that eligible business for determining the deductions under this section, the Assessing Officer shall take the profits "as may be reasonably deemed to have been derived therefrom". Nevertheless, if the above-mentioned arrangement involves a specified domestic transaction referred to in section 92BA, the profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F. 53. To uncover this camouflage, the Act applies "arm's length price" method. Section 92F of the Act defines certain terms relevant to computation of arm's length price. As per clause (ii), "arm's length price" means a price applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. To appreciate the concept of "arm's length price", we need to remember that section 80-IA covers inter-unit transfer of goods and services by an entity claiming deductions. Arm's length price is to be determined by applying any of the following methods: Comparable Uncontrolled Price Method; Resale Price Method; Cost Plus Method; Profit Split Method; Transactional Ne....
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....y deleted the disallowance of Rs.12.29 crore under section 14A of the IT Act in accordance with Rule 8D of IT Rules as held by the Mumbai Special Bench at Tribunal in ITO v. Daga Capital Management Pvt. Ltd,? 58. As the record reveals, the Assessee has contended that it has borrowed no funds for the investment in mutual funds. So, it has not debited any interest. In other words, the Assessee has merely parked its surplus funds in mutual funds. Nor has the Assessee invested in any equity shares. So it has not analysed the market conditions, stock investments, and so on. That is how the Assessee claimed the disallowance at Rs.25,78,156/-. 59. The AO was not satisfied with the disallowance and applied Rule 8D of the Rules. In fact, the AO accepted that the Assessee borrowed no money for investing but applied Rule 8D and made disallowance @0.5% of the average amount of investments at the beginning and at the closing of the year. 60. To reject the disallowance the Assessee claimed, the AO has reasoned that (a) the Assessee incurred no administrative expenditure on earning the dividend, (b) the disallowance the Assessee made towards the administrative expenditure is very low con....
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....xed after deducting expenditure from income. In that regard, the assessee need not establish a one-to-one correlation between income and expenditure. The provision reads: Section 14A. Expenditure incurred in relation to income not includible in total income.- (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act, in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of ....
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....es stood exempted under section 10(35) of the IT Act. The only issue was whether the respondent incurred any expenditure while earning that exempted income and whether it included that expenditure in the common indirect expenditure of its own. The Court ruled in the respondent-assessee's favour. First, unlike Sociedade De Fomento, the AO accepted that the Assessee had not borrowed funds. Second, the Assessee has deducted certain proportionate expenditure, which the AO has not disbelieved or disputed. Finally, given the volume of investment, the Assessee is said to have received charge-free services from the banks and other financial institutions with whom they have invested. So there is said to be no expenditure. 68 We reckon the ratio Sociedade De Fomento squarely applies to this case. And, thus, the third substantial question of law, too, shall stand answered against the Revenue. And it does. Result: All the substantial questions of law are answered against the Revenue and for the Assessee. TXA No.14 of 2013 69. This, too, is an appeal the Revenue has filed. In this, it attacked certain portions of the Tribunal's impugned judgment, dt.08.03.2013, and applied for co....