TMI Blog2006 (10) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... thing'. If the contention of the ld. A.R. for adoption of term 'manufacture' given by Exim Policy is accepted, and such a wider meaning is 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 this section makes it explicitly clear that the word 'manufacture' has to be read in the sense 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 does not hold good when the term 'manufacture' comes up for interpretation in the context of section 10B. Similar view has been expressed in the case of Arihant Tiles Marbles (P.) Ltd. [ 2006 (6) TMI 157 - ITAT JODHPUR] in the context of section 80-IA. We, therefore, hold that the assessee was not manufacturing or producing any article or thing as contemplated u/s 10B but was simply engaged in the polishing and finishing of the fully ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer should be erroneous. By erroneous we refer 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. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [ 2000 (2) TMI 10 - SUPREME COURT] held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirements of the order being erroneous. We, therefore, hold that the ld. CIT was fully justified in assuming revisional jurisdiction. Exemption u/s 10B v. Deduction u/s 80HHC - We are not inclined to accept the opinion of the ld. CIT for denying deduction u/s 80HHC simply on the ground that the assessee had claimed exemption u/sn 10B, which was not allowed by him. We further note that the parameters for the grant of deduction u/s 80HHC are different from those of section 10B. Moreover, the ld. CIT has himself mentioned in the impugned order that the assessee was allowed deduction u/s 80HHC in the past. By setting aside the impugned order on this score and without expressing opinion on the availability of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing or production, the exemption was not available. In reaching this conclusion he took note of the fact that raw material worth Rs. 1,96,970 was claimed to have been put into use for manufacturing, against which the sales have been shown at Rs. 1,66,31,317. By taking assistance from the case of CIT v. Sacs Eagles Chicory [2000] 241 ITR 319 (Mad.) it was noted that there could be no manufacture without consumption of raw material. He further did not accept the contention of the assessee that the goods so purchased subjected to processes like grinding, surface smoothing, chemical dipping, drawing, polishing and packaging etc. amounted to the manufacture of an article or thing. For this proposition he relied on the decision of the Hon'ble Rajasthan High Court in CIT v. Lucky Mineral (P.) Ltd. [1997] 226 ITR 245 affirmed by the Hon'ble Supreme Court in Lucky Mineral (P.) Ltd. v. CIT [2000] 245 ITR 830. He still further took note of the fact that the major expenses in manufacturing and trading account were towards packaging and no amount of wages was shown. In the background of these facts it was concluded that the assessee was engaged in trading activities, which coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culture, animal husbandry etc. It was explained that major investment in industrial undertaking was made in the preceding year to set up new industrial undertaking and it was approved as 100 per cent EOU on 28-3-2000. He relied on the decision of the Hon'ble Supreme Court in Vadilal Chemicals Ltd v. State of A.P. [2005] 5 VAT Reporter 123 to contend that the term manufacture/process has to be understood in the widest sense. He relied on certain other judgments in support of his claim, which we would discuss in the succeeding paras. It was also stated that though no wages were accounted for in the account books but the assessee had paid job charges for carrying out labour on piece rate basis. The sum and substance of his submissions was that the assessee was entitled to exemption under section 10B and alternatively if in any case the same was not allowed then deduction under section 80HHC be allowed as was claimed before the ld. CIT, who had unjustifiably rejected this contention. 4. In the opposition the ld. Sr. DR contended that the ld. CIT was fully justified in negativing the claim of the assessee for exemption under section 10B because the assessee was not engaged in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade it ineligible for exemption. It was also stated that the assessee-firm was formed by splitting/reconstruction of its predecessor firm namely Kwal Pro International and hence was rightly not accepted by the ld. CIT to be a new industrial undertaking. 5. We have heard the rival submissions in the light of material placed before us and precedents relied upon. It is obvious that the assessee claimed exemption under section 10B for the first time in this year after getting certificate from the competent authority on 28-3-2000. Prior to it, the assessee was claiming deduction under section 80HHC. The Assessing Officer vide his order under section 143(3) dated 30-9-2003 accepted the assessee's claim for exemption under section 10B on the basis of certificate issued by Noida Export Processing Zone. The ld. CIT while exercising his revisional power under section 263 came to hold that the order passed by the Assessing Officer was not only erroneous but also prejudicial to the interest of the revenue because the latter had not applied his mind and accepted the position as it is. He thereafter discussed the case from different angles and concluded that the exemption was erroneously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; Explanation 4.- For the purposes of this section, 'manufacture or produce' shall include the cutting and polishing of precious and semi-precious stones. 7. On going through the relevant portions of section 10B extracted above, it is patent that this exemption is available only if the conditions specified in 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 in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1998] 198 Suppl. SCC 174. After considering several cases on the point, the Hon'ble Supreme Court gave the test for determining the scope of this term in the following words: There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or series of changes, takes the commodity to the point where commercially it can no longer be regarded as the original commodity but, instead, is recognized as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marbles (P.) Ltd. v. ITO [2006] 10 SOT 225, has also denied the benefit of deduction under section 80-IA vide its order dated 30-6-2006, by holding that the assessee's activity of sawing of the marble blocks into slabs and tiles by a mechanical process did neither mean manufacture nor production. The Hon'ble Jurisdictional High Court in the case of D.D. Shah Bros. v. UOI [2005] 148 Taxman 1 (Raj.) had an occasion to consider a question as to whether the blending of different teas by a trader who purchased them would amount to manufacture. It held that the activity carried out would amount to processing of tea but not manufacturing or producing any article or thing within the meaning of section 80-IB. After making a microscopic analysis of the legal position and highlighting numerous judicial precedents directly on the point, the Hon'ble Jurisdictional High Court, in an exhaustive judgment, came to the conclusion that it did not amount to manufacture or producing any article or thing. 12. From the survey of the various decisions discussed above, it can be easily seen that the word 'manufacture' implies a change by which an earlier commodity loses its origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before the Jodhpur Bench of the Tribunal in the case of Arihant Tiles Marbles (P.) Ltd. After considering the ratio decidendi of this case it was held that mere cutting of marble blocks into slabs may not amount to manufacture or production of an article or thing. The only integrated activity of extracting granite, cutting the same into slabs/tiles, polishing and selling the end-products in the market would amount to production of an article or thing. 14. 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 milching 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, which have been noted above. 15. The Hon'ble Jurisdictional High Court in the case of D.D. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily make the thing to undergo a change loosing its original identity, whereas in 'manufacturing' the original article loses its identity and a thing differently known or recognized in common parlance comes into existence. 18. At this juncture, we are reminded of a celebrated decision rendered by the Hon'ble Bombay High Court in the case of CIT v. Sterling Foods (Goa) [1995] 213 ITR 851 in which the question for consideration was as to whether the processing of prawns amounted to 'manufacture' or 'production' so as to qualify for benefit under section 80HH. It was contended on behalf of the assessee that processing of prawns would amount to manufacture or production of an article within the meaning of section 80HH by relying on certain judicial precedents. Rejecting the assessee's contention the Hon'ble High Court held that the expression 'manufacture or produce articles' used in section 80HH has to be distinguished from the expression in the manufacture or processing of goods appearing in section 33B as the Legislature has specifically used the word 'processing' in juxtaposition to 'manufacture' wherever it intended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture and production used in various taxing statutes, are not interchangeable expressions. Though often used in juxtaposition, they convey different concepts and refer to different activities. Processing is a much wider concept. The nature and extent of processing may vary from case to case. Every process does not tantamount to manufacture . It is only when the process results in the emergence of a new and different article having a distinctive name, character or use, that manufacture can be said to have taken place. Similarly, production is wider than manufacture . As a result, every production need not amount to manufacture though every manufacture can be characterized as production . The benefit of section 80HH is available to industrial undertakings, which manufacture or produce articles . Industrial undertakings engaged in processing of goods or articles not amounting to manufacture or production are not entitled to the benefit of this section. So far as second aspect as to whether processing of prawns amounts to manufacture is concerned, it is clear that processing of prawns for making them fit for the market is not a process of manufacture. No manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ringing into existence some new commodity by an industrial undertaking. It would not be applicable in cases where only processing activity is carried out. Further, such production activity must be by an industrial undertaking and not by the assessee having mainly trading activity. Thus we find that the term 'manufacture or produce' in 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 we look 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he activities carried out by the assessee though amount to 'processing', but fall short of 'manufacture or producing an article or thing'. If the contention of the ld. A.R. for adoption of term 'manufacture' given by Exim Policy is accepted, and such a wider meaning is 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 this section 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 does not hold good when the term 'manufacture' comes up for interpretation in the context of section 10B. Similar view has been expressed in the case of Arihant Tiles Marbles (P.) Ltd. in the context of section 80-IA. 21. We, therefore, hold that the assessee was not manufacturing or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. Here we find that the ld. CIT fell in error because the assessee has 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 has been placed at pages 62 and 63 of the PB from which it can be found that the undertaking has not been formed by transfer to new business the plant and machinery used for any purpose. 24. The argument of the ld. D.R. regarding change in the constitution taking place in the assessee firm and hence disabling it to claim exemption under section 10B cannot be entertained at this juncture on the ground that the scope of the appeal is confined only to the points taken note of by the ld. CIT while resorting to section 263 holding the assessment order to be erroneous and prejudicial to the interest of the Revenue. Allowing the rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer in the revisional proceedings. According to him, where one possible view exists which the Assessing Officer has taken, the power of the ld. CIT gets ousted. Sounding a contra note, the ld. D.R. submitted that the Assessing Officer had passed an order in a mechanical manner without applying his mind to the fulfilment of the conditions laid down in section 10B and thus the benefit of exemption under section 10B came to be erroneously granted, which action was set right by the ld. CIT. 28. Having regard to the facts of the instant case in the light of the rival submissions made, we have to examine and evaluate as to whether the ld. CIT was within his competence to take action under section 263. At this stage, we reiterate the settled legal position that 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 we refer not only to the wrong decision by the Assessing Officer but also to the instances in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhpur Bench of the Tribunal in a recent order dated 31-82006 passed in the case of Udailal Anjana v. CIT [IT Appeal No. 140 (Jodh.) of 2006] has held that where the Assessing Officer did not make proper investigation, this rendered the assessment order to be erroneous and prejudicial to the interest of the Revenue. The Hon'ble Jurisdictional High Court in the case of Kanhaiyalal v. CIT [1982] 136 ITR 243 (Raj.) considered a case in which the Assessing Officer did not apply his mind to the various relevant facts relating to the construction of the house and assessment made by the Income-tax Officer was held to be erroneous and prejudicial to the interest of the Revenue. When the matter reached before the Hon'ble High Court, it held that the order passed by the ld. CIT revising assessment order to be perfectly justified. 31. Adverting to the factual position existing before us, we observe that the Assessing Officer in his effective one page order has discussed this aspect in a single para of seven lines by which 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 carri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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