TMI Blog2011 (3) TMI 1667X X X X Extracts X X X X X X X X Extracts X X X X ..... ed is ₹ 11,38,060/-. It was not allowed by the AO but was allowed by the learned CIT(A) and therefore, the Revenue is in appeal before us. 2.4 Similarly, in the AY 2003-04, the amount of deduction involved is ₹ 89,66,192/-. It was not allowed by the AO but was allowed by the learned CIT(A) and the Revenue has preferred an appeal. 2.5 In the AY 2004-05, the learned CIT(A) allowed deduction u/s 80IB to the tune of ₹ 3,54,93,137/- for Silvassa Unit and of ₹ 26,11,119/- for Daman Unit but restricted it to gross total income of ₹ 2,43,23,939/-. 2.6 In the AY 2005-06, the amount of deduction allowed by the learned CIT(A) is ₹ 14,85,74,625/-. There are other issues involved in the appeal in this year. Hence, they will be considered separately in the following paragraphs. 3 The lead year is Asst. Year 2003-04 where the AO has carried out investigation and written a detailed order which has become the basis for assessment in other years. Therefore, we will take up for discussion Assessment Year 2003-04. The grounds raised by the Revenue in all the assessment years except AY 2005-06 are the same except amount of deduction under challenges and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs. CIT(217 ITR 849 (Kar)- whereby the Hon'ble Karnataka High Court held that jron ore sizing and washing plant used in washing the impurities from iron ore and sizing the same is not manufacturing or production. (e) CIT Vs. Lucky Mineral Pvt. Lt. (226 ITR 245(Raj) - whereby the Rajasthan High Court held that mining of limestone and marble blocks and cutting and sizing of the same does amount to manufacture or production as the marble stone retains a continuing substantial identity. The said decision of Hon'ble Rajasthan High Court stands confirmed by the Hon'ble Supreme Court in the case of Lucy Minmat (P) Ltd Vs. CIT as reported in 245 ITR 830 (SC). (f) CIT Vs. Premier General Traders (P) Ltd(242 ITR 654(Bom)-whereby the Bombay High Court has held that grinding of soap stones and minerals cannot be regarded as manufacture of article or thing. (g) CIT Vs. Computer Graphics Ltd(285 ITR 84 (Mad)- whereby the Madras High Court has held that cutting of jumbo rolls of graphic colour paper into marketable size by the process of slitting neither amounts to manufacture nor production. (h) CIT Vs. Sri Meenakshi Asphalts (266 ITR 626(Mad) - whereby the Madras H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur ITAT) 11. ITO Vs. Sadhuram Gupta 66 ITD 441 (Chandigarh ITAT). 12. DCIT Vs. Bhogilal A\ulchand Kandoi 96 ITD 344 (A'bad ITAT). 13. ACIT Vs. Rameshchandra R. Patel 89 ITD 203 (A'bad 3rd Mem). 14. H. V. Venugopal Chettiar Vs. CIT 153 ITR 376 (Mad) 15. Hiralal Maganlal a Co. Vs. DCIT 96 ITD 113 (Mum). The Ld. CIT(A) has erred in not appreciating that the statements were backed by independent evidence. As per per assessee's submission dated 16.3.2006, iron scrap is purchased directly directly by the Ahmedabad Unit. However, iron scrap is claimed to be needed for the production of the main product Ferro Moly and is stated to be one of the ingredients required for the pilot process which determines the product mix which is communicated in the job order to the Ahmedabad Uni.t It is for the assessee to explain as to how the pilot process is conducted at Silvassa in the absence of iron scrap. The closing stock of the Silvassa Unit does not reflect any chemicals which could have been used for testing of raw material. Also unloading and sampling of each batch of raw material and re-loading for dispatch to Ahmedabad would curtail loading / unloading charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July, 2005. After that period, available deduction u/s 80IB was reduced to 30% from earlier available at 100% and therefore, the assessee opened another unit at Daman which was eligible for 100% deduction. This led the AO to have suspicion that no manufacturing activity as such is being carried out at Silvassa Unit or Daman Unit and they are only make-belief affair. In order to find out the truth, the AO carried out survey u/s 133A of the Act at all the three premises, i.e. at Silvassa, Ahmedabad and Daman Units on 17-01-2006. During the course of survey proceedings, the AO had recorded the statements of various persons on oath. From the material gathered during survey operation, the AO inferred that no manufacturing or production of any article or thing is carried out at two places, viz., Silvassa and Daman Units except occasionally crushing and grinding of the final product, with the help of one jaw crusher and two grinding machines and engaging few workers for sizing and sieving. The basis for arriving at this inference has been discussed by the AO in detail in the subsequent paragraphs in his order. This basis / reasoning are further summarized as under:- [a] Shri Sachchidan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 296 6 Chhaganbhai Dabhibhai 136 7 Ganesh Rapji 212 Since the assessee is running the factory with the aid of power, it has to employ 10 (ten) persons or more. This was considered to be a violation as per clause (iv) of sub-section (2) of section 80IB of the Act . 5.4 The AO also called for the explanation of the assessee on his view that the expenses of Silvassa Unit have been shifted to Ahmedabad Unit thereby reducing the profit of Ahmedabad Unit and increasing the profit of Silvassa Unit for claiming the benefit of deduction u/s 80IB of the Act. He listed such common expenses shifted to Ahmedabad Unit, as under:- (a) Salary / Wages (b) Contribution to PF, ESI Scheme (c) P.F. Admn. Expenses (d) Managing Director s remuneration (e) Commission on sale (f) Books and periodicals (g) Computer expenses (h) L.C. opening charges (i) Interest payments to directors and others, etc. 5.5 In response to the above show cause notice, the assessee explained that - (i) Substantial manufacturing proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Raw materials and igniting trial batch react ion Analysis of elements in lab Determination of the ratio in which different raw materials should be mixed to get desired chemical composition, recovery standards and customer requirement . -Soft skill (knowledge) -Soft skill (knowledge) -Soft skill (knowledge) 3 Ahmedabad Melting of Raw materials (based on information from Silvassa) Semi Finished Goods (slabs) Sand pit filled with quartz sand 4 Silvassa Crushing of Slabs into different size lumps and chips segregation and sieving -Can be sold to customers who ordered for lumps - To next stage Jaw Crusher Sieving 5 Silvassa Grinding Smaller chips and into different mesh size powder as required by customer Sieving Grading and mixing - Can be sold to customers who ordered for chips / powder - To be interchanged between sieving stage as well Grinder Sieving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvassa Unit, as material is directly transported to Ahmedabad Unit. [9] For all the purchase of Aluminium Powder, there is corresponding delivery challan and octroi payment receipt which shows that the octroi has been paid only at Ahmedabad, even though the delivery challan has been prepared in the name of Silvassa Unit. In majority of cases, the goods have been received on the same day as on the date of payment of octroi duty. Thus, no Aluminium Powder has traveled from Ahmedabad. [10] The assessee has not submitted any details or bills in respect of purchase Ferro Silicon at Silvassa Unit indicating that no such purchase was done at that Unit. [11] The purchase of iron scrap in the form of mill scale and nail chips is done at Ahmedabad Units for mixing with Molybdenum Ore. Thus no laboratory testing can be done at Silvassa Unit when there is no raw material received at that Unit. [12] The assessee does not carry out any laboratory testing and sampling of raw material at Silvassa because Aluminium Powder, Ferro Silicon, Iron Scrap never reached Silvassa. [13] No Sand Pit for carrying out lab testing is found at Silvassa or Daman as they are necessary for testing. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only after converting marble blocks into tiles. In the decision given by the Hon'ble Rajasthan High Court in the case of CIT v/s. Lucky Mineral Pvt. Ltd. (1997) 226 ITR 245, it was held that conversion of marble blocks into tiles does not constitute manufacture . This decision of the Hon'ble Rajasthan High Court has been affirmed by the three member bench of the Hon'ble Supreme Court in the case of Lucky Minmat (P) Ltd, v/s. CIT (2000) 245 ITR 830. (ix) The foodstuff prepared by cooking or by any other process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as a commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced - Indian Hotels Co. Ltd. v. ITO (2000)112 Taxman, 46 (SC). (x) Grinding of soap stones. Process of grinding of soap stones and minerals would not amount to manufacture of articles or things - CIV v. Premier General Traders Pvt. Ltd.(2000) 242 ITR, 654 (Bom.). (xi) A new article does not come into existence as a result of reconditioning of the old belt. CIT v. Neyveli Lignite Corpn. Ltd. (2001) 118 Taxman 230 (Mad.) (xii) Mining of Stone. If the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory and had not carried out any chemical testing before the material was sent to Ahmedabad. (iii) The Silvassa unit was not having any machinery purchased by it. (iv) The Silvassa unit was not having 10 or more workers employed and that it was not using power and fuel. (v) Thus main manufacturing activity was carried out at Ahmedabad and no manufacturing activity was carried out at Silvassa unit. (vi) Silvassa unit did only the grinding and crushing activities. 9.1 Considering the arguments of the assessee and reasoning given by the AO, the learned CIT(A) allowed the claim by observing as under:- 13. I have carefully considered the submissions made by the A.R. and the decisions cited by the Id. Authorized Representative and also carefully considered the assessment order and the remand report of the AO. On perusal of the facts and the submissions, I find that the imported raw material being molybdenum ore was received at Silvassa unit and then was chemically tested on sample basis at Silvassa and it is decided as to the ratio in which the other materials like ferro, silica, aluminium powder are to be added to the ore to obtain the final product and after the test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment at Silvassa. Thus one has to accept that the Silvassa unit manufactures the end produt which is being manufactured from the purchase of moly ore by carrying out one part of process at Ahmedabad. 13.1 The A.O.'s observation regarding employment of less than 10 workers is totally incorrect in view of the fact that in remand proceedings it was found by the AO that the appellant has more than 10 employees and that it has also got two casual workers. The various courts as cited by the Id. A.R. have held that the casual workers are to be considered for the purpose of section 80-1 and even the supervisory staff is also to be considered for the purpose of deduction under section 80-1. The decisions referred to by the appellant are very much in support of the explanation given by the A.R. 13.2 In so far as the employment of machinery is concerned, new machinery purchased for Silvassa unit is supported by the proper bills and transportation receipt i.e. L.R. These evidences have been verified in the remand proceedings by the A.O. Merely because the machinery has been purchased from Alimedabad it cannot be presumed that it was the machinery of Ahmedabad unit which was sent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant has produced ferro molly and moly di sulphide . The most important raw material is molybdenum and other important materials which have been added are aluminium powder, ferro silicon, iron scrap and quartz etc. The material is received at Silvassa from the port through trucks and as it enters into the jurisdiction of Dadra and Nagar Haveli entry tax has been paid to the Motor Vehicle department and the appellant has produced the receipt from motor vehicle department. The receipt of raw material is entered in the excise records i.e. register RG 23-A . After the job work was completed at Ahmedabad the material in semi finished product form of slabs was received by Silvassa unit where it was crushed and grinded and the slabs are changed to lumps, chips and powder. The slab has no use for any customer whereas the lumps are having chemically high content of molly and they are used in steel plants whereas chips are having lower molly and they are used in foundry and casting unit. Powder is having lowest molly content and it is used in electrode industry and sinter metallurgy. 13.5 As held in the case of Aspinwall and Co. Ltd. 251ITR 323 (SC ) manufacturing implies a complete trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 10 employees which has been verified by him. (iii) New machineries were purchased at Silvassa. It is not material that they were purchased at Ahmedabad and sent to Silvassa. These machineries are jaw crusher, vibro screen, double cone crusher, grinder, genset and lab equipment. (iv) The receipt of raw material is entered into Excise Register at Silvassa. They are dispatched for job work to Ahmedabad where they are melted and formed into slabs. (v) From Ahmedabad the slabs are transported to Silvassa where they are crushed, grinded and sieved to make lumps, chips and powder. Each of them contain different percentage of Molybdenum and are accordingly used by different industries. (vi) There is a change made in the article which resulted into a new and different article recognized in trade as distinct commodity. (vii) All the three items have different chemical composition of Iron, and molybdenum and all of them have different market use. (viii) The job work done at Ahmedabad resulted in income at Ahmedabad Unit which is so accounted for by the Ahmedabad Unit. (ix) Reallocation of expenses by the assessee company between Silvassa Unit and Ahmedabad Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shing and sizing is done to make the FMA in different sizes. Thus, none of the activities carried out at Silvassa Unit can be termed either as manufacture or production as per the requirements of section 80IB of the Act. [6] The iron scrap is purchased directly by Ahmedabad Unit. It is only a claim that iron scrap is needed for the production of the main product i.e. FMA and is one of the ingredients required for the pilot process which determines the product mix which is communicated in the job order to the Ahmedabad Unit. [7] The assessee had not explained how pilot process is carried out at Silvassa in the absence of iron scrap. [8] Closing stock of the Silvassa Unit does not reflect any chemical which could have been used for testing of raw material. [9] The unloading and sampling of each batch of raw material and reloading for dispatch to Ahmedabad would require loading and unloading charges but no such charges are debited in the Silvassa Unit. [10] All those persons whose statements were recorded during the survey have retracted their statements after long gap of time and such retraction after long gap of time is nothing but an afterthought. For this prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crap bitumen in order to obtain solid bitumen does not amount to manufacture or production as no new product emerged from the process and the bitumen continues to be bitumen with lesser quantity of oil and moisture. (i) CIT Vs. Sacs Eagles Chicory (241 ITR 319(Mad) - wherein the Hon. Madras High Court has held that preparation of chicory powder from the chicory does not amount to manufacture or production as there is no essential differences between the identity of the original commodity and that of processed article. The above said decision of the Hon'ble Madras High Court stands confirmed by the Hon ble Supreme Court in the same case reported in 255 ITR 178 (SC). (j) CIT Vs. Madurai Pandian Engineering Corporation Ltd (239 ITR 375 (Mad)- wherein the Hon'ble Madras High Court held that business of tyre retreading does not amount to manufacture or production as no new article comes into existence. The above said decision of the Hon ble Madras High Court stands confirmed by the Hon'ble Supreme Court in the case of Tamalnadu State Transport Corporation Ltd. Vs. CIT reported in 252 ITR 883 (SC). 11. Against this, the learned AR for the assessee has made elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial is entered into the Excise Record i.e. Form RG 23A Part 1. When material is sent from Silvassa to Ahmedabad, job work instructions are sent. They are also entered into RG 23A. Entry for custom duty is made for which the assessee gets Modvat Credit. These records are kept at Silvassa. [N] Lab reports of raw material testing is sent to Ahmedabad along with the raw material and they are recorded in the relevant registers. [O] After job work is done at Ahmedabad by melting Molybdenum Ore as per instructions issued by Si lvassa Unit, then slabs are formed which are transported back to Silvassa Unit. Relevant entries are made in the Dispatch and Receipt Registers. [P] When the iron and molybdenum is melted at higher temperature, it get mixed in different proportion at different level, i.e. different percentage of iron and molybdenum is mixed at different height of the slab so it is not a case that uniform proportion of iron and molybdenum is found in the slabs. When FMA slab is crushed and grinded, it results into lumps, chips and powder. Slab as such is not saleable or usable by any Industry in their production process. During crushing of Alloys of these two metals, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing at Silvassa are jaw crusher, grinder and sieving machine. For melting purpose no specific machine is required. It cannot be done in Sandpit and there is no need of any machinery as presumed by the AO. The required machineries and plant such as jaw crusher, grinder, sieving machine were present at Silvassa as verified by the AO during the survey. 11.2 Regarding the comments of the AO that there were no boiler, furnace or exhaust pipes, the learned AR submitted that the process of melting in assessee s case is carried out in the open Sandpit as vapours generally gets evaporated in open air. 11.3 The statements recorded by the AO of the persons available at the time of survey did not lead to any positive inference on either side. Whatever they have stated is broadly the process carried out at Silvassa and Ahmedabad Units. The inference drawn by the AO that no manufacturing activity is carried out at Silvassa, is his own inference. It is not proper to draw legal inference from the statements of the employees of the company. What is being done at Silvassa has been stated by them. What they stated is a part of manufacturing process. The other part of process i.e. cru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grinding. (vii) Page 358 is the Certificate of Registration in the Union of Territory of Dadra and Nagar Haveli as a dealer treating the assessee as a manufacturer through crushing and grinding only. (viii) Pate 363 is the Certificate from the Pollution Control Committee directing the assessee not to carry out primary metallurgical process and manufacture ferro alloys and not permitted to fusing of blended ferro alloys in the same premises. It also provided that the assessee can do such manufacturing by crushing and grinding only. (ix) Pate 365 is the Certificate of The National Small Industries Corporation Limi ted where also the assessee is shown dealing in Ferro Molybdenum. (x) Page 367 is a Licence to work as a factory which indicates that the factory is engaged in the manufacturing of Ferro Alloys and Molybdenum di sulphide. (xi) Page 402 is a letter from Mukand Ltd., - the customer of the assessee written to Mr. Adarsh Jhaveri [date not known] indicating that the lumps of FMA was dispatched. A representative sample is drawn from the heap of Ferro Molybdenum offered for inspection and analyzed in laboratory but when not known. (xii) Page 403 is a Joint Inspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int that even if it is presumed that the assessee is only doing crushing, grinding and sieving, then still it is to be held as engaged in manufacturing and processing and therefore, the assessee would be entitled to deduction u/s 80IB of the Act . 12. In rejoinder the ld. DR primarily summarised as to what he has argued. He submitted that level of the activity in Silvassa and Daman are after it received slabs. Further what is paid to Ahmedabad unit for carrying out the real manufacturing i.e. melting of molybdenum and iron was just minimal i.e. ₹ 5 to 6 per kg. It is less than 2% of the value. It shows that assessee has kept entire profit at Silvassa for claiming higher deduction under section 80IB. He submitted that by inappropriate allocation of expenditure by Ahmedabad unit to Silvassa unit minimal profit is created at Ahmedabad unit and substantial profit is created at Silvassa unit for claiming higher deduction. By these process assessee has shown loss at Ahmedabad and profit of ₹ 16 crores at Silvassa unit. The AO is bound to accept the certificates of registration by other departments such as Excise, Sales-tax, Octroi. They are issued prior to any activity ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mestone by crushing into role or limestone crushed could be a process of manufacturing but that was confined to provision of section 32A and it created a new product but in the present case product before processing is Ferro Molybdenum Alloy and after processing also it is the same. On the other hand, the decision of Hon. Rajasthan High Court in CIT vs. Lucky Mineral (P) Ltd. (1997) 226 ITR 245 (Raj) is more nearer to the facts of the present case. There also marble- boulder-work into slabs were sold, the cutting of boulder into slabs might have been with the aid of machinery but the original commodity retains a continuing substantial identity through the processing carried out by the assessee company. It was not held as manufacturing for the purpose of section 80 HH. This judgment was confirmed by Hon. Supreme Court in Lucky Minmat (P) Ltd. vs. CIT (2000) 245 ITR 830 ) SC. Thus where final product after processing retains the same character and identity, it will not amount to manufacture. The ld. DR on the similar reasoning sought to differentiate the decision of Hon. Apex Court in ITO vs. Arihant Tiles and Marbles (P) Ltd. (2010) 320 ITR 79 (SC) wherein slabs were cut into raw ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Ahmedabad Unit where manufacturing process of converting molybdenum into molybdenum iron alloy known as FMA slabs is carried out. In fact according to the ld. DR, it is the main and only manufacturing processing and what is done at Silvassa i.e. crushing, grinding and sieving is not manufacturing process. He also submitted that if melting or any metallurgical process as prohibited by the local authorities at Silvassa, then it cannot be presumed that assessee was melting FMA sample to find out molybdenum and iron contents therein. From this the ld. DR inferred that in fact there was no laboratory existing at Silvassa. He supported his contention with the statements of various persons recorded during the course of survey. 12.1 The ld. DR also submitted a note in support of this argument which is reproduced below to highlight his arguments. It may please your This is a typical case, in which the provisions of the section 80IB, enacted by the Parliament to promote industrial development of Backward areas and to create employment in backward were misused by creating a 'make believe' set up at Silvasa (from 1999 to July, 2005) and at Daman {from 2004 till date). 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace at Ahmedabad unit. 6. Company claimed 80IB(4) deduction for the first time in 2000-01 and the year wise profit shown at Ahmedabad unit and the new Silvasa unit since 1995-96 are as under: A.Y Profit of Ahmedabad unit 80IB Claim (Silvasa Unit) 1995-96 10,10,421 N.A 1996-97 2,72,363 N.A 1997-98 2,66,247 N.A 1998-99 1 ,30,660 N.A 1999-2000 Not readily available N.A 2000-01 NIL 10,83,126 2001-02 NIL 5,78,841 2002-03 NIL 11,38,060 2003-04 NIL 2,43,23,939 2004-05 NIL 89,66,912 7. It may be seen from t he table above that, after the Silvasa / unit was set up in 1999-2000, all the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced and crushing and grinding is manufacturing. 10. Assesses has ^educed various evidences like ESI / PF Tit details, Appointment of lob technician, 2 test reports, ice for purchase of machinery for Daman unit, evidence for purchase of lab equipment. It has produced certificates of FeMo Lumps, Chips and powder are different users as to what percentage of Mo is required by them in the factories. 11. All these evidences are rebuttable, based on the facts on the information collected during survey and the statements recorded during the survey. These have been argued by the Sr. DR in detail bringing out the facts which stand against the assessee and disaprove the claims of the assessee. The same are briefly mentioned under During the survey only '8h workers were found at Daman unit, statements of these '8' workers were recorded. Photograph of 8 workers were token, which is submitted to your honors. Assesses claims that Production in-charge and Lab Technician who is a M.Sc. Chemistry Postgraduate as worker. It is submitted that the word used in sub douse [iv] of SOI I2J is worker . A worker has to be given the meaning of 'worker and supervisory or tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was found during survey. (No tests necessary for furnished product say statement of Atul D Patel, Q.No.8). (9) Claim that pilot/trail tests are done at Daman (page 319) is baseless, as no such furnace for conducting the trial tests was found at Daman. No reports or registers of Trial pilot tests were found at Daman as already mentioned. IV. Assessee claims that the slab/cake of Molybdenum produced at Ahmedabad factory is semi finished and it is the input material to Daman/Silvasa unit. This claim is not correct as per the facts emanating from the record as under :- (i) Slabs of FeMo as per statement of Adarsh Zaveri are about 3 ft. wide and weigh 300/400 kg. (see Ans.No.15 of statement recorded, Annexure-1 to Assessment order.) There is no proof anywhere that these slabs were transported as slabs to Silvasa/Daman, contrary to that there is evidence to show that the FeMo was transported as lumps or in other forms to Daman. FeMo is always transported in Drums and the drum sizes are such that they cannot take 3 ft slab of 300/400 kg. (ii) Therefore, it is clear from circumstantial evidences that FeMo Alloy, after production at Ahmedabad was transported after breaking into b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mo to be 60% and any percentage above that percentage does not make any difference as far as chemical composition is concerned. Please see letters of various users of FeMo at page numbers, 396, 397 398 of paper book filed by the assessee where in the users mentioned as to what they require was 60% Minimum Mo. There is no different percentage of Mo requirements for customers, as claimed by the assessee. Lumps, chips and powder of FeMo are being received at Silvasa/Daman as stated by the labour and also plant incharge at Daman during the survey proceedings. This can also be seen from the electricity consumption at Ahmedabad. Therefore, it transpires that only occasional crushing and grinding was only being done at Silvasa/Daman that too of the recycled material coming out of sieving and not the primary crushing and grinding was taking place Silvasa/Daman. 12. To summarise, the material is directly being received at Ahmedabad from Navsheva Port in the same truck(s) which start at Mumbai. No load/unloading is taking place at Silvasa/Daman. No loading/unloading charges are debited at Silvasa/Daman. The labourers at Daman/Silvasa are not involved in loading and unloading. No rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at Silvassa due to widening of roads by the local authorities the work had become unorganized at Silvassa. The case laws cited by the ld. DR are not applicable to the facts of the case of assessee. The case of the assessee is squarely covered by the decision of Hon. Supreme Court in the case of ITO vs. Arihant Tiles and Marbles (P) Ltd. (supra). 14. The ld. AR further submitted that FMA lump, FMA chips and FMA powder have different physical and chemical property and have different uses. He referred to following chart in the Paper Book: Sl.No. Raw Material Finished goods Finished goods Finished goods 1 Commercial name Fe.Mo.Slab Fe.Mo.Lump Fe.Mo.Chip Fe.Mo.Powder 2 Character (properties) Chemically the material is not honogenous. Its melting temperature is above 2000 degrees C. Chemically it has high Mo. And low C.Si. Fe. (Iron) Its melting temperature is 1700 degrees C. Chemically it has lower Mo. And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax. S :0.1% Max P :0.1% Max. Size:20-80 mm We cannot use Ferro Moly in smaller size such as powder or small chips. Please give us your offer as early as possible. Thanking you, For Vardhman Special Steels Sd/- Puneet Gupta) Executive (Materials) 14.3 Similarly letter from TATA was referred which is placed at page 397 of the paper book to the effect that they can only use FMA chips of the size below 10mm for making special grade for Exh. Manifold Turbine Hsg. Castings.The contents of the letter are as under :- To Electro Ferro Alloys (P) Ltd., 208, Aditya, Nr. Khadyata Colony, Mithakhali Six Road, Ahmedabad-380006. Attn: Mr. Anant Ramesh Sir, We are manufacturing S.G. Iron castings having medium frequency induction furnace of 3MT capacity. We regularly require Ferro Molybdenum chips of size below 10mm for making special grade for Exh. Manifold Turbine Hsg. Castings. The specification is as under :- Moly 60% Min. Si : 1.6% Max. C: 01.% Max. S :0.1% Max. P :0.1% Max. We cannot use larger size Ferro Moly lumps of 20-100 mm as the melting temperature becomes very high also we cannot use Ferro Moly powd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a material. Coarse grained materials have lower yield stresses than fine grained material. Moly is a strong carbide former and these carbides promote fine grained structure. Hence material having higher Moly % possesses higher yield stress and critical shear strees. Hence when a Fe Moly slab is crushed, the parts on the top part of the slab reduce in size i.e. break easily because it has lower Moly content. This results in a change in chemistry from the large sized lumps which do not break easily because they contain the higher Moly % which has higher critical shear stress. Thus crushing results in a change in chemical composition of a beterogeneous slab when different sizes are separated. 14.8 Similar comments from Climax Molybdenum Co. were referred to which we for the sake of convenience reproduce as under:- a) We find the Moly content of the block is highly variable, and not necessarily linked to the position of the block. The fluid dynamics of the molten mass, the cooling rates and the freexing points of all the different components viz. silicon, carbon, copper, iron and moly play a part in the chemical content. We would expect to find moly content varying between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abs which at different levels have different proportion of molybdenum and iron due to their different specific gravity. Molybdenum due to higher specific gravity settles in different proportion at different levels in a rectangular slab. These FMA slabs are sent to Silvassa and also to Daman where they are crushed through jow crusher, grinded through machines and thereafter sieved to separate them into rubbles, chips and powder. These items are sold to different customers. 15.1 There is no dispute that rubbles, chips and powder are used by different industries in the manufacturing of their products. Molybdenum has a catalytic action for further chemical reaction. The iron content in the alloy acts as a regulator for the catalyst. In any case, the different degree of chemical sensitivity of molybdenum and iron if combined in different proportion is not established by the assessee but there is no doubt about difference in physical property of three final products obtained on crushing, grinding and sieving of FMA slab. In this regard the disputed areas are - (1) Whether assessee had ten or more workers as it is running with the aid of power; (2) Whether assessee had any labora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) 001, wherein it is held that casual workers should also be counted for arriving at number of persons employed by the undertaking. It held that workers means a person employed directly or through any agency whether for remuneration or not for any manufacturing process. Worker according to section 21 of the Factory Act 1948 includes a person who is employed not only in manufacturing process but also in cleaning any part of the machinery or premises used for manufacturing or in any kind of work incidental to or connected with manufacturing process. A manufacturing process consist of chain of activities such as storage bringing material to manufacturing site, main manufacturing process, sorting, packing, storage etc. Then all the workers involved in these activities should be considered for counting the requisite number. Temporary and casual workers apart from permanent work force are required to be counted for finding out the requisite number. In view of this, we reject the contention of ld. DR opposing the argument of the assessee that it had employed 10 or more workers. 15.3 (2) Whether assessee had any laboratory testing facilities at Silvassa. In order to support his argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be carried out at Silvassa due to restrictions imposed by the local authorities and other proposition that melting was indeed carried out for testing. In-spite of repeated questions by the department to show the equipment with which such testing was carried out at Silvassa assessee remained silent. Therefore, we have only option to hold that assessee failed to produce evidence to show that any laboratory existed at Silvassa where melting of final produce was carried out for testing the proportions of their contents. Further assessee could not produce any evidence that any testing was carried out of molybdenum ore to find out the percentage of molybdenum impurities. As a result, we hold that any laboratory test or existence of laboratory at Silvassa could not be established by the assessee. We may add that laboratory testing as such is not a manufacturing process but it can be said to be a prelude to manufacturing process and therefore, a necessary integral part of entire process of making FMA. 15.4 (3) Whether it was only outsourcing at Ahmedabad or main manufacturing was done at Ahmedabad. According to the ld. DR main manufacturing was done at Ahmedabad in the form of mixin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it at high degree temperature of 1800 degree centigrade and forming of the slab is one stage where one intermediate product is formed. It has different identity and structure. It can be sold as such and can be purchased by those who would use it as raw material for making other products of finer quality. Therefore, the claim of the assessee that it had outsourced a part of manufacturing process to Ahmedabad unit cannot be rejected unless it is found out by the AO that all the activities at Silvassa were only a smoke screen. Since it was not a case and books of Silvassa unit are accepted then the transaction carried out by it with Ahmedabad unit cannot be rejected without there being any material in support of such rejection. 15.5 (4) Whether Silvassa unit was formed by splitting of Ahmedabad unit. In our considered view no. Assessee had produced evidence of purchase of new machinery like jaw crusher and grinder which is not disputed by the revenue. There is no evidence to show that any machinery was transferred from Ahmedabad to Silvassa. It cannot be said that it was a case of splitting of process and therefore, splitting of unit. Ahmedabad unit has been carrying out this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to whom assessee sells FMA. At Silvassa these slabs are crushed by jaw crushers. Then grinded to make granules and during process of grinding small pieces called chips and powder is formed. Size of granules is about 4 to 10mm, size of chips is of about 1 to 3 mm and powder contents of FMA of very small size of less than 1 mm. It is informed by the Metallurgical Engineers of the assessee company during the course of hearing that in the slab at various level, different proportion of iron and molybdenum is settled. Where percentage of molybdenum is higher granules are formed while crushing, as it gives higher strength to the alloy and becomes difficult to further crush, unless larger forces is applied. With calculated force applied granules and chips and powder are formed. All the three items contain different proportion of iron and molybdenum. All the three products are purchased by different industries depending upon their requirements of catalyst. It is informed to us that lumps and granules are used by steel plants, chips are used by foundry and casting units and powder is used by Electrode Industries. All these industries use catalysts agent containing different percentage of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of deduction u/s 80IB. The raw material used was rectified spirit and what were manufactured were bear, wine and other alcoholic spirits. It was held that the end product was quite different than the rectified spirit which was converted into bear, wine and other alcoholic spirits even though basically they would be alcoholic. The raw material including rectified spirit are not fit for consumption by human being but the end product being IMFL potable and is so recognized in the trade. 16.2 In ACIT vs. National Lamination Industries (2007) 295 ITR (AT) (ITAT Ahmedabad) held that where raw material used was CRGO coils whereas items which emerged after various processes is called transformer core. It was undisputed that CRGO coils cannot be used in a transformer unless all the processes are completed and the end product as such is formed. Thus, there cannot be any dispute that due to various processes the product so found i.e. the core of the transformer is of a distinct name and use. By this process, the raw material looses its identity and new product comes into existence which is commercially recognized as a new product. The assessee was held entitled to deduction u/s 80 IB. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that expression manufacture in ordinary acceptance is of wide connotation. It means making of article or material commercially different from the basic component by physical labour or mechanical process. The word production or produce when used in juxtaposition with manufacture takes in, bringing into existence of new goods by the process which may or may not amount to manufacture. In that case, the assessee was engaged in ship breaking, old ships were brought for the purpose of breaking. Most of the ships are imported from international markets. What is purchased is ship and not merely scrap. Thus, ships i.e. raw material has a separate identity which is an input in the ship breaking industry. In the course of braking activities the ship looses its identity and results in production of several items such as (1) ferrous metals,(i) rerollable steel (ii) melting steel (iii) cast iron scrap, (2) non-ferrous metals like (i) aluminium (ii) brass (iii) copper, (3) non-metallic items like (i) PVC material, (ii) wooden material etc. These items are used as raw material in other industries. Thus, scrap and steel obtained by dismantling and breaking of the ship must be regarded as diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerals (P) Ltd. (1977) 226 ITR 245 (Raj) the Hon ble Rajasthan High Court held that the word manufacture implies change but every change is not manufacture although every change in article is a result of treatment, labour and manipulation. To bring about the change qualifying as manufacture, something more is necessary and that something is transformation of the original raw material into a new distinct and different article having new identity, name character or use. Where the commodity retains a continuing substantial identity even through the processing stage it cannot be said that it has been manufactured. 16.11 In Romit Kumar Sharma (2009) 309 ITR 344 (AAR) the Authority for Advance Ruling held that the essence of manufacturing is that what is made shall be a different thing from that out of which it is made despite the original material not losing its identity completely. In that case, the assessee was processing raw-casting and its primary job was to provide milling, tooling and grinding of the surface of the new castings of the rear cover and differential housing of a tractor. The processing was done through a special purpose machine, special jigs and jags and tools. Pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r who was buying tendu leaves and tobacco. Assessee had hired contract workers who rolled the leaves into bidis which was sold under its brand name. It was held that tendu leaves and tobacco which were used as inputs do not retain their independent identity after the bidis are produced after undergoing various processes. Commercially the final product is known as different commodity and has a separate market. It was held that the assessee was engaged in manufacturing of bidis entitled to deduction u/s 80 HH and 80 I. 16.16 The Hon ble Supreme Court in CIT vs. Empty Poly-Yarn (P) Ltd. (2010) 320 ITR 665 (SC) considered the case of an industrial undertaking which was using POY (partially oriented yarn) as input, crimps, bulkiness, etc. are introduced by the process called thermo mechanical process which converted POY into texturised yarn. The thermo mechanical process brings about a structural change in the yearn itself which is one of the important tests to be seen while judging whether a process is manufacturing or not. It was held that twisting and texturising of POY amounts to manufacturing for the purpose of section 80IA. 16.17. The concept of manufacture was further exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht from Ahmedabad Unit. It is a semi-finished product having very large size of 100 mm to 400 mm. It has varying contents of molybdenum, iron and silicon which vary according to the time given for freezing, to the melted mixture of iron, molybdenum and silicon and also to percentage of silicon and iron melted with molybdenum. As per the certificates relied upon by the learned AR and not controverted by the revenue, the fluid dynamic of the molten masses i.e. molybdenum, iron and silicon depends upon cooling rates and freezing of the different components contained in the mixture. This can change the molybdenum from 60% to 75% at the extreme i.e. from the top to the bottom. Molybdenum has higher specific gravity which settles down faster as compared to other components i.e. silicon and iron. Therefore, if higher time is allowed for freezing, greater quantity of molybdenum will settle down at the bottom and lesser quantity at the top. Therefore, the slabs i.e. the input contains varying amount of molybdenum in its different parts. The lower part of the slabs contains higher quantity of molybdenum as compared to the higher part of the slab which has lesser quantity of molybdenum. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bs as such cannot be used. These end products are known by different names in commercial world and therefore, the process employed by the assessee would amount to manufacture and, therefore, the assessee would be entitled to deduction u/s 80 IB. We accordingly confirm the order of the learned CIT(A) on this point. 20. Thus above discussion disposes of the appeals of the Revenue for Asst. Year 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05 which are as per above discussion dismissed by upholding the order of ld. CIT(A). C.O. No.171/Ahd/2008 in ITA No.2339/Ahd/2008 Asst. Year 2005-06 (Assessee s C.O.) 21. The assessee has raised following grounds in its Cross Objection :- (1) On the facts and in the circumstances of the case, the CIT(A) erred in rejecting the assessee s claim that for quantification of deduction u/s 80IB the credit balances in the following three accounts were required to be considered as income derived from the eligible business. (i) Excise income (ii) Interest on FD and LC (iii) Insurance claim received for damages on goods (2) Without prejudice, on the facts and circumstances of the case, in respect of the interest income assessee s claim of ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Where assessee has borrowed funds and paid interest and deposited such borrowed funds into F.D. then netting would be allowed but where borrowed funds are utilized elsewhere there cannot be direct nexus of interest earning and interest expenditure. Netting to that extent cannot be allowed. For the purposes of finding out nexus we restore the matter back to the file of AO. This issue is allowed for statistical purposes. 21.4 The third item is about insurance receipt for damages on goods. The issue is directly covered by the decision of Hon. Delhi High Court in CIT vs. Sportkind India Ltd. (2010) 324 ITR 283 (Del) wherein it is held that if assessee receives insurance on damages there is definitely a nexus with the business. The compensation amount received by the assessee company from insurance company has to be taken into account in determining the profits and gains of industrial undertaking. Accordingly this part of the claim of assessee is allowed. 21.5 The last issue in the Cross Objection is about netting of interest. As we have held above the netting of interest can be allowed only to the extent interest expenditure is directly relatable to the earning of interest. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute that the motor car was purchased for the purpose of business of the appellant. Thus the motor car being business asset of the appellant and purchased for the purpose of business and used as such by the appellant, in view of the decision in the case of Mysore Minerals 239 ITR 775 referred to above and other decisions cited by the ld. AR, I hold that the disallowance made by the AO on this ground is not justified and hence the same is directed to be deleted. 22.2 In the present case it is not disputed that investment was made by the assessee in purchase of the motor car. It is shown as asset in the balance sheet of the company. If expenditure for running the vehicle was incurred by the assessee, the assessee is de facto owner of the vehicle. It is not disputed that it was used for the purpose of business of the assessee company. Hon. Rajasthan High Court in the case of CIT vs. Mohd. Bux Shokat Ali (No.2) (2002)256 ITR 357 (Raj) held that where vehicle was purchased by the firm used by it for the purpose of its business but it was registered in the name of one of the partners then the firm would be entitled to depreciation on vehicle. Hon. Delhi High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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