TMI Blog2014 (7) TMI 1277X X X X Extracts X X X X X X X X Extracts X X X X ..... Laila Impex is also an EOU. Thus, we uphold these findings of the first appellate authority and dismiss the grounds raised in this regard. Appeal of the revenue is dismissed. In the issue of directions of the CIT(A) to the AO to compute the profit of 21.27% of the turnover, as the same is attributable to the outsourcing of manufacture through job works and, then to exclude such profits from the profits eligible for deduction u/s 10B, we hold that the same is contrary to law. No such exclusion is contemplated in the Act. We are supported by the propositions laid down by the Mumbai Bench of Tribunal in the case of Gebbs Infotech Ltd. (2010 (10) TMI 1083 - ITAT MUMBAI). Thus uphold the directions of the learned CIT(A) as in this case also, what was outsourced was a part of the job of manufacturing i.e. step 1 out of the 6 steps or stages of manufacturing activity. - IT APPEAL NOS. 398 TO 401 & 462 TO 465 (398/V12) OF 2012 C.O. NOS. 7 TO 10 (VISAKHA.) OF 2013 - - - Dated:- 30-7-2014 - SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER Assessee by : Shri G.V.N. Hari Revenue by : Shri K.V.N. Charya ORDER 1. These are the cross app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the filtrate by using of vaccum (removing of excess water, hydro alcohol) and this process is repeated till thick paste or residue is obtained. Step 3 : Process of drying: The above thick paste is dried in sinplast drier/spray drier. After drying, paste will become solid dry flakes. Step 4 : Process of pulverization: The dried flakes are milled in multi mill and thereby it becomes powder. Step 5 : Process of sieving: The milled powder is sieved on sifter by using required meshes to get fine powder as per requirement of the customers. These products have a separate name and entity in the market. Step 6: Packing: The above powdered extract is packed into air tight HOPE Carboys having double polythene bags in different sizes as per requirement of the buyers. 2.2 The appellant firm took permission vide letter dt. 14th October, 2005 to send its raw material to its sister concern Laila Impex for job work. As per customs regulations, subcontracting of both production and production processes may be undertaken without any limit through other EOU. Laila Impex is also an EOU as evidenced by approval letter dt. 3rd June, 2005. 2.3 The DDIT (Inv.) conducted a survey at the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, but, all other manufacturing expenditures like raw-material, chemicals, fuel, manufacturing establishment, etc., have also to be considered. Thus, on facts he held that outsourcing of job is only about 21.27% and not 90% as held by the AO. He referred to certain judicial decisions and granted relief to the assessee. 3. Thereafter, the learned CIT(A) on the ground that the assessee has not completely proved that its employees have, in fact, supervised the job work, which was off loaded, held that, profit on the turnover attributable to job work i.e. 21.27% of the total turnover should be ascertained and that such profits should be excluded from claim of deduction u/s 10B of the Act. 4. Aggrieved, the revenue is in appeal on the decision of the learned CIT(A) that the assessee is eligible for deduction u/s 10B. The assessee is in appeal against the direction of the learned CIT(A) that profits on 21.27% of the total turnover being job work should be computed and excluded from the computation of eligible profit for deduction u/s 10B. 5. Grounds of appeal of the revenue, which are common, in all its appeals, are extracted below for ready reference: (a) The CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b work charges in total mfg. expenses at 21.27%. (k) The learned CIT(A) erred in calculating the % of job work charges in total manufacturing expenses at 21.27% as against 96.56% worked out by the A.O. (l) Any other ground that may be urged at the time of hearing. 6. Grounds of appeal of the assessee, which are common, in all its appeals, are extracted below for ready reference: 1. The order of the Learned Commissioner of Income Tax (Appeals), Vijayawada is contrary to the facts and also the law applicable to the facts of the case. 2. The Learned Commissioner of Income Tax (Appeals) ought to have held that the notice issued u/s 148 not a valid notice in as much as the assessing officer did not furnish the reasons recorded by him despite repeated requests on the part of the appellant. 3. The learned Commissioner of Income Tax (Appeals) ought to have held that the notice issued u/s 148 is not a valid notice in as much as the notice was issued on mere 'change of opinion' more so when the exemption u/s 10B was allowed in the original assessment completed u/s 143(3) of the Act after making necessary enquiries. 4. The learned Commissioner of Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein. He referred to the fact that the assessee has outsourced its manufacturing activity and argued that the AO has come to this factual conclusion based on the material gathered and the evidence proved that no manufacturing activity has taken place in the assessee's premises for the AY 2005-06 as there was no machinery. 8. On the issue of job works, he relied on the order of the AO and submitted that major portion of the work is carried out by job works outside the premises of the firm and under such circumstances, it cannot be said that the firm undertook any manufacturing activity on its own during the year. 9. The learned counsel for the assessee Shri G.V.N. Hari, on the other hand, relied heavily on the order of the learned CIT(A) and submitted that a remand report was called from the AO and based on various uncontroverted evidences confirmations/registrations and certificates from various governmental agencies, the learned CIT(A) has rightly come to the conclusion that the assessee was in possession of the plant and machinery during FY 2005-06 and that the assessee has, in fact, manufactured herbal products during that FY and, hence, its claim of deduction u/s 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, we hold as follows: 14. On the issue whether the unit was actually in existence in the previous year relevant to AY and whether it started manufacture and process of herbal extracts, the learned CIT(A) at para 13 to 13.8 of his order held as follows: '13. Whether the unit was actually in existence in the previous year and whether it had started manufacturing the products (herbal extracts)? 13.1 The appellant has been recognized as a 100% EOU and authorized to manufacture herbal extracts as per statutory approvals duly given by VSEZ. The appellant has purchased machinery to the tune of ₹ 1,07,31,482/- during the year, which includes machinery purchases of ₹ 99,77,802/- and labour charges of ₹ 7,53,680/-. To verify the genuineness of the expenditure claimed on account of machinery purchased, the appellant was asked to produce original bills along with evidence of payment for purchase of machinery. The appellant had produced the entire set of invoices relating to machinery and the relevant payment details which show that the machinery has been purchased on various dates during the previous year and the payments towards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently confirmation letters were filed by 3 persons representing the above labour contractors. An extract of letter received from Sri K.L.V. Ramana, filed before the Assessing Officer and placed in the assessment folder is given below : To The Asstt. CIT, Circle I, Vijayawada. Dear Sir, Sub : Fabrication erection of SS304, 3KL Reactors - Reg. I am a Qualified mechanical Engineer with B. Tech Degree. I worked as a mechanical Engineer on salary basis in M/s. Sri Srinivasa Fabricator, Vijayawada, Autonagar during the year 1997 - 2003. After closure of the firm due to the expiry of the proprietor, I wanted to establish my own fabrication unit by procuring orders. I kept an office at Hyderabad and tried to get the orders. During this period, M/s. Laila Nutraceuticals gave me an order to fabricate 2 nos. of 3KL Reactors, 2 nos. of condenser shells and receivers. The material for the above work was supplied by the customer and I was paid only Labour charges for the above work. My work is to procure labour and to fabricate the equipment. Accordingly, I provided the labour and executed the work at the premises of the customer M/s. Laila Nutraceuticals, VJA and ere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firming the installation and utilization of the machinery in the premises of the appellant at Shed Nos.6 and 7, Phase-III, Jawahar Autonagar, Vijayawada. An extract of the letter is reproduced below; Office of the Superintendent of Central Excise Customs, Range-IV, C.R. Buildings, M.G. Road, Vijayawada-2. O.C. No. 618/2005 dt. 06/10/2005 To The Development Commissioner, VEPZ Duvvada, Visakhapatnam Sub: Intimation of inspection report - Reg. Ref.: Your L.O.P. No. 273/EOU/VSEZ/2005, dt. 22/03/2005 of M/s Laila Nutraceuticals. With reference to the above, it is to inform you that, we have inspected the premises of M/s. Laila Nutraceuticals, registered under 100% Export Oriented Unit situated at Shed No.6 and 7, Phase III, Jawahar Autonagar, Vijayawada-7 and Physically verified the erected machinery at the time of inspection as follows: 1. Reactors 3 Nos. 2. Filters 3 Nos 3. Calendria 1 No 4. Drier 1 No 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts. This is issued to the unit as desired to further submit the same to Income Tax Authorities : Sd/- (B. Raja Babu) Asstt. Development Commissioner To M/s. Laila Nutraceuticals, 40-15-14, Brindavan Colony, Vijaya Wada-520 010' (ix) Certificate of Licence to manufacture Ayurvedic Drugs received from Department of Ayurveda, Yoga Naturopathy, Unani, Siddha and Homeo (AYUSH), Govt, of Andhra Pradesh. (x) Certificate of Good Manufacturing Practice dated 31.12.2005 received from Department of AYUSH, Government of Andhra Pradesh. (xi) Annual Permission dated 14.10.2005 to send goods to M/s. Laila Impex for job work received from Asstt. Commissioner of Customs Central Excise, Vijayawada. (xii) ESI Inspection Report dated 03.04.2006 confirming engagement of labour in manufacturing and sale of herbal extracts at the appellant's unit. 13.6 In view of the substantial evidences from various Governmental Departments above and further in view of the fact that the confirmations letters have been filed with regard to the machinery purchased and the payment having been made through banking channels, I have no hesitation in holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he balance of ₹ 7,53,680/- confirmation letters were filed before the DIT (Inv.) (f) No part of the machinery from the sister concern M/s Laila Impex was transferred to the assessee as evident from the examination of the balance sheets. (g) All the six steps involved in the manufacture of herbal extracts as listed out at para 3.2 of the assessment order at pages 5 6 are part of the manufacturing activity. The conclusion of the AO that only 2 steps involved in manufacturing activity and that remaining 4 stages i.e. drying, powdering, Sievenge and packaging are not part of manufacturing activity, is not factually correct, (h) The AO records that only step 1 of the manufacturing process i.e. process of solution, was outsourced and that step 2 to step 6 were carried out by the assessee itself. It is well settled that when the assessee is entitled to outsource part of the manufacturing activity on job work basis it is eligible for claim of deduction u/s 10B of the Act. 16. These factual recordings by the CIT(A) could not be controverted by the learned DR with evidence. The inferences drawn by the DDIT (Inv.), which are reflected in the assessment order, are devoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the activities in the first 5 stages are carried out, the manufacture of the finished product cannot be said to be completed in the appellant's case. Even the 6th stage of packing in the appellant's case is a necessary adjunct to the process of manufacture, in as much, the packing would have to be specialized keeping in view the need for long preservation and quality requirements in export process and the attendant disclosures regarding product as required under local laws in the country to which the product is exported. 19. Thereafter, at paras 14.9 to 14.11, the learned CIT(A) held as follows: 14.9 The Assessing Officer has held that substantial portion of the manufacturing activity has been outsourced by taking into account the ratio of the manufacturing expenses and the manufacturing establishment expenditure to the amount of job work outsourced to M/s. Laila Impex. Accordingly, he held that around 90.4% of total manufacturing expenses has been paid to M/s. Laila Impex. Similarly, with regard to Manufacturing Establishment Expenses, he has held that 91.1% has been incurred by M/s. Laila Impex. The expenditure has been subsequently reimbursed to M/s. Laila I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be taken into account. In this context, as mentioned above, only the first stage of manufacturing i.e. the 'process of solution' has been given on job work to M/s. Laila Impex and all the other stages of manufacturing process, including the process of concentration, process of drying, process of pulverizing, process of sieving and process of packing are done by the appellant itself. However, as held by various judicial pronouncements mentioned in the preceding paras, the appellant is not precluded from carrying out the part of the stage of manufacturing through job work. 14.11 Apart from the above, the appellant contended that the power and fuel expenditure has larger component of diesel, which is mandated by frequent power cuts, necessitating use of generator for manufacturing activities. Though, the Assessing Officer has commented on this issue in the assessment order, he has not brought out any evidence to show that generator has not been utilized for manufacturing processes by the appellant. Therefore, since the generator expenditure has been incurred exclusively by the appellant and form significant part of the total expenditure on power and fuel, it can be pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors, is an intermediate product. He contends that what was given by the job work contractors was an end product by itself. He submits that the product is a module by itself and not a part of overall module. On a query from the Bench, he submitted that in a software industry the full work for development of software is undertaken by one developer. He relied on the order of the AO and submitted that the AO's finding that the assessee should get proportionate deduction is to be upheld. 16. The learned counsel for the assessee, on the other hand, submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis. He contended that the software development cycle consists of more than 20 different parts and only part of the software development was outsourced. He relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Penwalt India Ltd. [1992] 196 ITR 813 (Bom.) as well as on the decision of the Hon'ble Bombay High court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich deduction has been claimed is derived from the unit/undertaking. If part of the work has been done by outside parties, it cannot be concluded that the profit has not been derived by the appellant from the undertaking. It is not in dispute that the entire profit of 100 per cent is only out of the export undertaking. Under the circumstances, the stand of the A.O. cannot be sustained. This ground is therefore allowed in favour of the appellant. 19. We also hold that this decision is in line with the judgment of the jurisdictional High Court in the case of CIT v. Penwalt India Ltd. [1992] 196 ITR 813 (Bom.).' (Emphasis Supplied) 24. Consistent with view taken by the Tribunal, we (sic-vacate) uphold the directions of the learned CIT(A) as in this case also, what was outsourced was a part of the job of manufacturing i.e. step 1 out of the 6 steps or stages of manufacturing activity. 25. As regards cross objections filed by the assessee, we find that they are in support of the order of CIT(A). 25.1 The AO in other year has simply followed his order for AY 2006- 07. He held that if exemption is not allowed for AY 2006-07, the balance exemption cannot be allowed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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