IN THE ITAT JODHPUR BENCH

Kwal Pro Exports

v.

Assistant Commissioner of Income-tax, Circle-1, Jodhpur

R.S. SYAL, ACCOUNTANT MEMBER

AND HARI OM MARATHA, JUDICIAL MEMBER

IT APPEAL NO. 633 (JODH.) OF 2005

[ASSESSMENT YEAR 2001-02]

OCTOBER 6, 2006

Section 10B of the Income-tax Act, 1961 - Export Oriented Under­taking - Assessment year 2001-02 - Whether mere recognition as 100 per cent Export Oriented Undertaking (EOU) by a competent authority does not enable assessee to claim exemption under section 10B and it is only when such 100 per cent EOU manufactures or produces any articles or things or computer software along with fulfilment of other conditions stipulated under sub-section (2), that benefit of exemption can be sought - Held, yes - Asses­see-company purchased fully manufactured but unpolished handi­craft items like coffee table, almirah, dining table, etc., and subjected said items to processes of grinding, surface smoothen­ing, chemical dipping and treatment, drying, heating, polishing and packaging - Whether since identity of commodity, before and after undergoing various processes, did not change and remained same in commercial world, assessee could not be said to have manufactured any article or thing -Held, yes - Whether, therefore, assessee could not be held entitled to benefit of exemption under section 10B - Held, yes

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 2001-02 - Whether acceptance of assessee’s claim under section 10B by Assessing Officer, without peeping into conditions laid down under section 10B would render order erroneous and prejudicial to inter­est of revenue and, therefore, Commissioner was fully justified in assuming revisional jurisdiction- Held, yes

Section 253, read with section 263, of the Income-tax Act, 1961 - Appellate Tribunal - Appeals to - Assessment year 2001-02 - Whether scope of appeal against order passed under section 263 is confined only to points taken note of by Commissioner, while resorting to section 263, holding assessment order to be erroneous and prejudicial to interest of revenue and revenue cannot be allowed to raise additional ground in appeal for strengthening order under section 263 - Held, yes

Section 80HHC, read with section 10B, of the Income-tax Act, 1961 - Deductions - Exporters - Assessment year 2001-02 - Whether parameters for grant of deduction under section 80HHC are differ­ent from those of section 10B and deduction under section 80HHC cannot be denied simply on ground that assessee had claimed exemption under section 10B, which was not allowed by Commissioner or assessing authority - Held, yes

Facts

The Assessing Officer allowed the assessee’s claim for exemption of its entire business income under section 10B, on basis of the certificate granted by the competent authority certifying that assessee was a 100 per cent EOU. Subsequently, the Commissioner noticed that the Assessing Officer had not examined the issue regarding exemption under section 10B properly inasmuch as it was not ascertained as to whether or not the assessee had complied with the other conditions laid down under section 10B. In re­sponse to a show-cause notice, the assessee explained that it was a manufacturer-cum-exporter of handicrafts items as it was buying semi-finished goods i.e., structures of specified items from the market and after subjecting such goods to so many processes, it was exporting them. The Commissioner, while observing that the assessee had only exported the goods purchased from local market without doing manufacturing or production, concluded that the assessee was engaged in trading activities which could not be called as manufacturing or producing anything and, thus, denied the benefit of exemption under section 10B. He further noticed that to claim exemption under section 10B, the unit under reference was simply created on papers in the same business premises with same manpower and with the same existing machinery, in which the assessee was already doing business in earlier years, and that the asses­see had got no machinery of its own and the goods exported by it were manufactured and produced in the plant and machinery belong­ing to others, which had already been in use for so many years. During the revisional proceedings, the assessee claimed before the Commissioner that if it was held not eligible for exemption under section 10B, then its claim for deduction under section 80HHC must be allowed. However, revisional authority did not accept the assessee’s case on the ground that once the assessee had preferred to claim exemption under section 10B, then it was not open for it to change its position after completion of as­sessment.

On appeal :

Held

Whether the assessee is manufacturer or producer, the exemption under section 10B is available only if the conditions specified under this section are fulfilled. The first and foremost condition is that the assessee should be 100 per cent export oriented undertaking, which manufactures or produces any article or thing. Explanation 2(iv) makes it abundantly clear that a 100 per cent export oriented undertaking referred to under sub-section (1) means an undertaking, which has been approved by the competent authori­ty. Thus, the approval of the undertaking by a competent authori­ty as 100 per cent EOU is primary condition and after that, such undertaking should be engaged in manufacture or production of any article or thing or computer software. Thus, the mere recognition as 100 per cent EOU by a competent authority does not enable the assessee to claim exemption under section 10B, unless it satisfies other conditions, such as it manufactures or produces any articles or things or computer software. The contention of the assessee that since the competent authority had granted it a certificate to the effect that it was 100 per cent EOU, exemption under section 10B would automatically come into force, did not withstand logic. It is only when such 100 per cent EOU manufac­tures or produces any articles or things or computer software along with the fulfilment of other conditions stipulated under sub-section (2), that the benefit of exemption can be sought. [Para 7]

The essence of ‘manufacture’ is the change from one object to another for the purposes of making it marketable with the aid and employment of three Ms viz., Men, Machinery and Material. It should further be taken into consideration that every change in the raw material cannot be characterized as manufacture, unless a new product, which has separate commercial identity in the mar­ket, comes into being. There must be such a transformation that a new and different article must emerge having distinct name, character and use. Mere giving of new name by the seller to what is really the same product is not manufacture of a new product. [Para 10]

The word ‘manufacture’ implies a change by which an earlier commodity loses its original identity and there emerges a differ­ent article having distinctive name and character or use from the original commodity. If the original commodity continues to remain the same after undergoing processes and is called by the same name, it cannot be said that there is manufacture of an article or thing. Thus, the main test is to decide as to whether the identity of the commodity, before and after undergoing various processes, changes or remains the same in the commercial world. Therefore, the assessee, in the instant case, could not be said to have manufactured any article or thing. [Para 12]

The next contention of the assessee was that the processes under­taken by the assessee, if not considered to be of manufacturing, might be considered as equivalent to producing an article or thing, since the scope of the latter term is wider than that of the former. The point of view of the assessee that the term ‘produce’ is wider than ‘manufacture’ was to be accepted. [Para 13]

The word ‘produce’ includes within its ambit not only activity of manufacturing the material by applying human endeavour on some existing raw material but also securing certain produce from natural element, for example, by growing plants on soil, or by operating mines and the like or for example by milking the cow, the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk. Hence, it can be easily ascertained that the word ‘production’ includes within its purview the word ‘man­ufacture’ and also other activities. [Para 14]

However, on construing the term ‘production’ with reference to an article or thing in the context of an undertaking, it amounts to not less than manufacture of such article in any manner. To put it simply, though the term ‘produce’ is inclusive of manufacture with reference to an article or thing which is subjected to application of different processes to raw material as a result of which the end-product is a commercially different and newly transformed commodity, yet it encompasses other things within its purview, such as, securing produce from natural element, that is by growing plants on soil or by mining, etc. It is in this con­text that the decision of the Supreme Court, in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331/[2005] 142 Taxman 16, has been rendered in which both extraction and processing of ore were held to amount to production. It is further in this context that the Jodhpur Bench of the Tribunal, in the case of Arihant Tiles & Marble (P.) Ltd. v. ITO [2006] 10 SOT 225 (Jodh.) (TM), has held the process of conversion of marble block by sawing into slabs and tiles and polishing as not amounting to production or manu­facture because it lacked the first ingredient mentioned in case of Sesa Goa Ltd. (supra) being the extraction of marble blocks. Examined in the light of the above legal position, the activities performed by the assessee in question did not yield a new product and basically there was no difference in the identity between the original and processed items of handicrafts exported by it and, hence, the case could not be cabined in the expression ‘produc­tion’. [Para 16]

It would be relevant to consider another word ‘processing’ fall­ing in this family of terms, which means a sequence of opera­tions. The term ‘processing’ has to be distinguished from ‘manu­facturing’ in the sense that a mere processing does not ordinari­ly make the thing to undergo a change loosing its original iden­tity, whereas in ‘manufacturing’ the original article looses its identity and a thing differently known or recognized in common parlance comes into existence. [Para 17]

The contention of the assessee, that in view of the Exim Policy 1997-2002, in which the term ‘manufacture’ has been defined in a very broad sense even including agriculture, animal husbandry, floriculture, horticulture, etc., the term ‘manufacture’ under section 10B should not be granted a strict meaning so as to push away the activity carried out by the assessee from its ambit, was sans merit for the reason that the word ‘manufacture’ has not been defined in the Act and it has different shades of its mean­ing. It is to be interpreted in the context of the object and language used under the relevant section. When the term ‘manufac­ture’ is viewed in the setting of section 10B, it becomes crystal clear that it is used to mean production of a new article or bringing into existance some new commodity by an industrial under­taking. In view of the decision of the Supreme Court, in the case of Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 538/112 Taxman 46, the term ‘manufacture or produce’ under section 10B can be considered only when a commercially new and distinct product comes into existence after undergoing manufacturing activities. The simpliciter proc­essing in a general sense, which does not amount to manufacture, has been taken away from its ambit. The intention of the Legisla­ture becomes abundantly clear when one looks to the language of Explanation 4 to section 10B, which provides that for the purpose of this section, ‘manufacture or produce shall include the cutting and polishing of precious and semi-precious stones’. With this Explanation, the Legislature has widened the purview of ‘manufac­ture or produce’ only in a restricted sense by including cutting and polishing of precious or semi-precious stones within its ambit. If the intention had been to include ‘processing’ as understood generally as a condition precedent for granting exemp­tion under section 10B, the words ‘manufacturing or processing’ would have been used instead of ‘manufacture or produce’. Further, Explanation 4 leaves nothing to doubt that barring the exception of process of polishing of precious and semi-precious stones, all other processing of goods or articles, which do not result into transformation of new product, have been kept away from benefit of exemption under this section. By no stretch of imagination, it can be inferred that all processings, not amounting to manufac­ture of an article, can be made eligible for exemption under section 10B. [Para 19]

In the instant case, the activities carried out by the assessee were in the nature of different stages of polishing and packing. The polishing alone done by the assessee on handicraft items could not be named as ‘manufacture or productions’. The items purchased by it retained the same character and nomenclature before and after processes performed over them. Such items, which were hitherto unpolished and/or rough, got finished. For example, the dining table purchased by the assessee, remained the dining table after polishing and finishing done on it. Therefore, the activities carried out by the assessee though amounted to ‘proc­essing’, but fell short of ‘manufacture or producing an article or thing’. If the contention of the assessee for adoption of term ‘manufacture’ given by Exim Policy was accepted, and such a wider meaning was assigned to include the processing not amounting to manufacture within its purview, the provisions of Explanation 4 to section 10B would be rendered a nullity, which obviously cannot be the case. The presence of Explanation 4 in section 10B makes it explicitly clear that the word ‘manufacture’ has to be read in the sense discussed above excluding the mere processing of goods, that does not amount to manufacturing or bringing a new article in existence. In the like manner, the further contention, that under the Sales Tax Act the term ‘manufacture’ has been used in a different manner, did not hold good, when the term ‘manufac­ture’ comes up for interpretation in the context of section 10B. [Para 20]

Therefore, the assessee was not manufacturing or producing any article or thing as contemplated under section 10B, but was simply engaged in the polishing and finishing of the fully manufactured items purchased by it. Consequently, the benefit of exemption under section 10B was rightly not available to the assessee and the Commissioner was fully justified in his view on that aspect of the matter. [Para 21]

Conditions of section 10B(2)(ii) and (iii)

As regards the observation that unit under reference was simply created on papers, the Commissioner had recorded an incorrect finding for the reason that the assessee-firm had been in existence since 1997 and was doing business of purchase and sale of items by getting the processing done from outside parties. It was in the preceding year that the assessee claimed to have set up its own unit and obtained certificate from competent authority on 28-3-2000. The assessee was already in existence as could be seen from the copy of the Trading and P&L account, etc., for the assessment years 1999-2000 and 2000-01. On the contrary, Kwal Pro International, taken note of by the Commissioner as having been availing deduc­tion under section 80HHC in the past, came to be established only on 11-8-2000 as was evident from the copy of its partnership deed. The revenue had not controverted that factual position. In the light of said facts, there was no difficulty in holding that the Commissioner erred in coming to the conclusion that the second condition laid down under section 10B was not fulfilled. [Para 22]

Similar was the position regarding the third condition under section 10B(2)(iii). On that aspect, the Commissioner stressed on the need to have plant and machinery by industrial undertaking of its own, which should not have been used by somebody else for some other purpose. He held that since the assessee did not have the machinery of its own, then how the goods could be manufac­tured or produced. The Commissioner fell in error because the assessee had acquired new plant and machinery worth Rs. 3,23,941 in the year ending as on 31-3-2000, whereas the opening balance under the head ‘Plant and machinery’ in that year was only at Rs. 5,668. The detail of machinery account had been placed from which it could be found that the undertaking had not been formed by transfer to new business the plant and machinery used for any purpose. [Para 23]

The argument of the revenue, regarding change in the constitution taking place in the assessee-firm and, hence, disabling it to claim exemption under section 10B, could not be entertained at the appealeate stage on the ground that the scope of the appeal was confined only to the points taken note of by the Commissioner, while resorting to section 263, holding the assessment order to be erroneous and prejudicial to the interest of the revenue. Allow­ing the raising of an additional ground by the revenue strength­ening the order under section 263, would frustrate the scope of this section and amount to conferring the jurisdiction of the Commissioner under section 263 upon the revenue, which cannot be the case. The satisfaction of both the conditions of section 263, viz., the erroneous order and prejudicial to the interest of the revenue has to be judged by the competent authority alone, which was the Commissioner in the instant context. The revenue can elucidate the points considered by the Commissioner, but no new point, different from those considered by the Commissioner, can be argued at the appellate stage to drive home the contention that the assessment order was erroneous, as it would amount to the revenue stepping into the shoes of the Commissioner. Hence, that aspect of the matter was to be refused to be considered. [Para 24]

Therefore, out of the three issues, on the basis of which revi­sional proceedings were started and order was passed under sec­tion 263, the latter two were without any force, but the impugned order was sustainable on the non fulfilment of first condition, viz., no manufacture or production of an article or thing by the assessee. [Para 25]

As per the provisions of section 10B, an undertaking must fulfil the following main conditions :

   (i)  It must be an approved hundred per cent export oriented undertaking;

  (ii)  It must produce or manufacture articles or things or computer software;

(iii)  It should not be formed by splitting/reconstruc­tion of business;

(iv)  It should not be formed by transfer of old machinery;

  (v)  There must be repatriation of sale proceeds into India;

(vi)  Audit report should be submitted in the prescribed form;

(vii)  It must not transfer ownership or beneficial interest in undertaking.

All the conditions as set out above are to be satisfied simultane­ously. If any of the conditions is not fulfilled, the benefit of exemption under section 10B does not stand. Since in the instant case, the assessee was not producing or manufacturing articles or things, there was no scope for allowing benefit of this exemp­tion. [Para 26]

Whether revisional power was properly exercised

In order to take action under section 263, the order of the Assessing Officer should not only be erroneous, but also prejudi­cial to the interest of the revenue. The twin conditions are to be satisfied simultaneously. First condition is that the order passed by the Assessing Officer should be erroneous. By erroneous one refers not only to the wrong decision by the Assessing Offi­cer, but also to the instances in which he has not applied his mind to the material placed before him before accepting the assessee’s claim. [Para 28]

In the instant case, the exemption was held to be available on the basis of certificate issued by the competent authority. Neither any endeavour was made to consider the activity carried on by the assessee as to whether or not it amounted to manufac­ture or production of an article or thing, nor the question of satisfaction of other conditions enshrined under section 10B was looked into. Acceptance of the assessee’s claim without peeping into the conditions laid down under section 10B, what to talk of the investigation of the fulfilment by the assessee, certainly ren­dered the order erroneous and prejudicial to the interest of the revenue. Therefore, the Commissioner was fully justified in assuming revisional jurisdiction. [Page 31]

Exemption under section 10B v. deduction under section 80HHC

Further, during the revisional proceedings, it was claimed before the Commissioner that if the assessee was held not eligible for the exemption under section 10B, then its claim for deduction under section 80HHC must be allowed. The Commissioner did not accept the assessee’s claim on the ground that once the assessee had preferred to claim exemption under section 10B, then it was not open for it to change its position after completion of assess­ment. The view taken by the Commissioner was not convincing for the reason that what was material to be examined was the satis­faction of the conditions laid down under section 80HHC. If larger benefit has been denied to the assessee, but a smaller benefit is otherwise available as per law, the assessee cannot be shown the door simply on the ground that his claim for larger benefit stands rejected. Therefore, the opinion of the Commis­sioner for denying deduction under section 80HHC simply on the ground that the assessee had claimed exemption under section 10B, which was not allowed by him, could not be accepted. Further, the parameters for the grant of deduction under section 80HHC are different from those of section 10B. Moreover, the Commissioner had himself mentioned in the impugned order that the assessee was allowed deduction under section 80HHC in the past. By setting aside the impugned order on that score and without expressing opinion on the availability of deduction, the Commissioner was to be directed to examine the assessee’s claim for the benefit under section 80HHC subject to the fulfilment of the conditions laid down under the section. [Para 32]

In the result, the appeal was to be partly allowed.