TMI Blog2003 (8) TMI 462X X X X Extracts X X X X X X X X Extracts X X X X ..... rading export and not export of manufacturing goods. 3.The Assessing Officer was of the view that interest earned by the assessee is non-business income and it is to be considered as gross amount of interest and not net amount of interest. 3. The CIT(A) set aside the order of the Assessing Officer on first issue and directed the Assessing Officer to exclude excise duty and sales tax from total turnover for the purpose of computation of deduction under section 80HHC of the IT Act. But remaining two issues have been decided against the assessee and the assessee is in appeal against those issues before us. First we take up the issue whether export of marine products were trading export or processing by the assessee. The assessee engaged in the manufacturing of own products from its Cochin office. It has also exported marine product i.e. frozen fish, octopus etc. During the year the assessee exported marine product at Rs. 3,25,56,084 at FOB price. During the assessment proceedings the Assessing Officer found from Form No. 10CCAC that assessee s auditors have mentioned export turnover at Rs. 13,91,30,895. In the said form the Assessing Officer has found nothing against column of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that processing of prawn does not amount to manufacture or production of article. In the case of CIT v. Baraka Overseas Traders [1993] 201 ITR 827 Kerala High Court held that processing of marine product and beef amounts to production of articles. However, the facts of that case are very much different from the facts of assessee s case. In that case there were several activities done by the assessee on prawn and on beefs, whereas the assessee has not undertaken any such activities. The assessee has simply purchased headless fishes, stored them at a temperature of below freezing point and has exported the same in the ships. In fact prawns and fishes are different. The prawns requires many activities to make it ready for marketable whereas the fish and octopus etc. exported by assessee does not require those activities. The same is the position with beef. In the Circular No. 329, dated 22-2-1982 ITR Vol. 135 page 7 it has been clarified that if the process should involve manufacture of new saleable commodity then it amounts to manufacturing. However, in the case of the assessee the commodity was the same i.e. headless fishes and octopus etc. etc. there is no change in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80HHC on trading items. In view of this discussion, the assessee is not entitled for any deduction under section 80HHC on trading items. The figure of export turnover for the purpose of working out the deduction under section 80HHC on manufacturing items has been reduced to the extent of export of trading items at Rs. 3,25,56,084." 4. The CIT(A) confirmed the action of the Assessing Officer with the following observations: "I have considered the findings of the Assessing Officer in his assessment order, submissions of the appellant and the decisions relied upon. First of all, the decision of the Hon ble Kerala High Court in the case of Sea Pearl Industries is not applicable in the case of the appellant. The said decision was with regard to determining as to who is entitled to claim deduction under section 80HHC, whether it is the export house or the assessee and hence this case law is of no help to the appellant. The Assessing Officer, in his order, brought out the fact that the assessee is purchasing headless fish, octopus and other items from local supplier as per the purchase vouchers and as per the sale invoices the same items are exported. Various activities befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne products and hence conclusion drawn by Assessing Officer is not proper. (5)To the effect that appellant is processing marine products, the marine product export development authority, Cochin has issued a certificate and these processing activities are being carried out since 1992, as per the certificate issued by them. (6)As per the letter issued by Export Inspection, Agency, Cochin the assessee is approved unit for processing fish and fishery products for export under ITOC system. (7)The Kerala High Court in the case of Sea Pearl Industries 151 Taxation 241 decided that marine products when processed for export are eligible for deduction under section 80HHC of the Act. The appellant repeated similar facts as per before the Assessing Officer to show that there was processing by undertaking various activities and a diagram was submitted which showed the following operations: ( i )Raw material collecting from harbour, landing centre, suppliers. ( ii )Pre-processing wherever required. ( iii )Transportation to factory (sorting). ( iv )Weighing and washing. ( v )Processing for grading and removal of filth (sorting washing). ( vi )Filling in small packets after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appearing at page 182 [(28th August, 1991 to 22 August, 1993), page 186 (23-8-1993 to 22-8-1995), page 187 (23-8-1995 to 22-8-1997) and page 188 from 26-8-1997 to 25-8-1999) of assessee s paper book]. The ld. AR submitted that the aforesaid lease agreement covered the entire period for all the assessment years under appeal. The said processing is being looked after on behalf of the assessee by its employee and/or agent Shri M.V. Natrajan. The Raymon Foods Pvt. Ltd. is a sister concern of the assessee firm. He further submitted that all purchases are effected by assessee itself for this purpose. The ld. AR pointed out at pages 150 to 158 where specification of purchase vouchers and order form in the name of assessee are placed. The ld. AR has also submitted that the quality of goods purchased is duly mentioned by the purchaser as processed and packed by Raymon Glues Chemical, the ld. AR pointed out this fact from page 156 of assessee s paper book. The purchase order also denotes the goods should be of first quality, fresh, free from defects and fit for human consumption. On the basis of these facts the ld. AR submitted that the main activity of purchase and sale is effected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of marine product is an activity of trading goods or goods processed by the assessee. It is not a case where the claim of the assessee that the goods exported is manufactured by the assessee. The "trading goods" has been defined in Explanation ( f ) to sub-section (3) of section 80HHC which reads as under: " f . Trading goods means goods which are not manufactured (or processed) by the assessee." 10. The processing activities pointed out by the assessee which has reproduced by the CIT(A) at page 4 of his order read as under: "( a )Pre-processing : ( i )Trolley for transportation from one section to other section ( ii )Peeling tables ( iii )Fish washing machine ( iv )Ring cutting machine ( v )Preservation tube ( b )For processing: ( i )Freezing trays. ( ii )Grinding machine ( iii )Preservation utensils ( iv )Grading table ( v )Peeling utensils ( vi )Freezing stands ( c )( i )Pate freezers ( ii )IOF machinery ( iii )Tunner tubes ( d )For packing ( i )..... ( iii ).... ( iv ).... ( e )Cold storage capacity of 100 tonnes ( d )Compressor for cooling ( e )Atmosphere condensers and accumulators." The certificate dated 21-4-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketable form as live stock by slaughtering, grain by milling, cotton by spinning, milk by pasturising, fruits and vegetables by sorting and repacking. The Hon ble Court held accordingly that activity of assessee in that case in cutting the tobacco leaves into small leaves or pieces and after removing the dust and unwanted stems from the tobacco leaves, selling to them to the bidi manufacturers, involved processing of goods. 12. In the light of above discussion we are of the considered view that the activities of marine product of assessee like Shrimps, cuttle fish, Ribbon fish, squid and other fish varieties converted into PVD, PD, PD vain, headless shrimps cuttle fish whole etc. etc. amounts to processing. 13. The other controversy to examine whether such processing done by the sister concern of the assessee amounts to processing by the assessee or not. For this purpose we consider some decisions which are as under: 14. In case of Chillies Exports House Ltd. ( supra ) wherein rejecting the argument as to the activity done through outside agency, the Apex Court observed on page 824 that activity relating to fumigation by the treatment with methyl bromide, on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd defective or unserviceable for any reason, it is the assessee company which has to bear the consequences. The Tribunal, observing that, in the absence of a factory or manufacturing facilities of its own, the assessee company utilizes the manufacturing facilities of Turner Hoare on payment, held that this fact by itself did not make any difference and the assessee was engaged in the manufacturing activity, that is, of manufacturing sugar and tea machinery. Accordingly, the Tribunal held that the assessee was entitled to relief as contemplated under section 80-I of the Income-tax Act, 1961. Dr. Balasubramanian, ld. counsel for the revenue, fairly admitted that it was not necessary for a person to be engaged in a manufacturing activity that he should undertake all manufacturing activities by himself and that it would be enough if he engages himself in a part of the manufacturing activity and gets the rest of it done through the agency of others. In the present case, according to Dr. Balasubramanian, no part of the manufacturing activity was done by the assessee. Everything concerning the manufacturing of sugar and tea machinery was, he pointed out, done by Turner Hoare, and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract other than a contract of purchase. Coming to the facts of the instant case, we find from the facts found by the Tribunal that the assessee s manufacturing activity consisted of ( i ) canvassing of orders, ( ii ) preparing of designs and drawings on the basis of orders, ( iii ) placing orders for the manufacture of machinery with Turner Hoare, ( iv ) to see that the manufacturing process is carried on by Turner Hoare under the direct supervision of the assessee company, ( v ) to have a check over the quality control and last but not the least, to be responsible for the proper functioning of the machinery and guarantee after sale service for a stipulated period. Out of so many activities, except for one activity, namely, getting the machinery manufactured through Turner Hoare, all other activities are, admittedly, undertaken by the assessee company. In the circumstances, we find no difficulty in agreeing with the Tribunal that the assessee is engaged in the business of manufacture of sugar and tea machinery and is, accordingly, qualify for relief under section 80-I. In the above view of the matter, we answer the third and fourth questions also in the affirmative and in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assignors on the other part, Whereas the first party is the owner of the plant namely Raymon Foods Pvt. Ltd. at Cheriyakadavu, Kochi-8, having facilities to process, freeze and pack, marine products and also having cold storage facilities. Whereas second party is regularly processing, freezing and exporting various marine products for export from first parties plant. Whereas the second party now put forward the proposal that the first party have to lease out the entire plant and first party agreed to lease out the entire plant to second party. Now therefore this agreement witnesses as follows: (1)The first party confirm to leased out the entire plant, cold storage, other facilities to the second party. (2)The first party confirms that, they will not undertake any processing, storing or any other work themselves in the plant or leased out any part of facilities of the plant to any other parties. (3)The first party confirm that they shall bear expenses such as electricity, repair and maintenance of plant and machinery etc. (4)The first party shall provide the second party necessary labour and operators for running the machineries including freezer and compressors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in large master cartons as per the customers requirements and sealed. Orders of supplies are directly made to the assessee company by the foreign buyers. The processing work done at factory taken on lease from Raymon Foods (P.) Ltd. is directly controlled and supervised by the assessee company. The factory given on lease shall be exclusively used by the assessee company and M/s. Raymon Foods (P.) Ltd. will not undertake any processing storing or any other work in the plant or lend out any part of facilities of the plant to any other parties. Further, the stock lying in cold storage at factory premises taken on lease shall not be hypothecated by that Raymon Foods (P.) Ltd. The assessee company is to strictly comply with all statutory laws and will take necessary insurance for product to be processed and stored in first parties cold storage taken on lease by the assessee company. From above discussion we find that goods was processed by the assessee, merely the processing was carried out in a factory taken on lease from sister concerns, M/s. Raymon Foods (P.) Ltd., it cannot be held that the goods have not processed by the assessee. 18. After insertion of word "processed" in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals Ltd. [1999] 237 ITR 579 ( sic ) confirmed the view of the Assessing Officer. The contention of the ld. AR that the interest income be netted and then only 90% may be reduced. The ld. AR also relied upon the order of the CIT(A) for assessment year 1995-96 where such netting was allowed. It is also the submission of the ld. AR that the fixed deposit made with the banks were out of cash credit accounts withdrawals. 21. We have heard the ld. representatives of the parties and perused the record. After considering the totality of the facts of the case we would like to examine the issue on the basis of accounting principles. As per the accounting principles the interest account has two sides debit and credit, the interest received is required to be credited and the interest paid is required to be debited. On the basis of this accounting principles the balance in the interest account is to be taken in the final statement i.e. profit and loss account. This accounting principle supports the claim of the assessee. Further, the contention of the assessee that the fixed deposits from where the assessee received interest income were made out of the cash credit accounts. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and claimed be engaged in the processing of marine product of the assessee s Kochin branch. The Assessing Officer further observed that the assessee is exporting marine products from its Kochin branch and the Kochin branch paid processing charges to Raymon Foods Ltd. at the rate of 5.75 per kg. including storage charges for unlimited period. The assessee paid processing charges of Rs. 24,67,250 to M/s. Raymon Foods Ltd. on account of processing of marine products and further payment of Rs. 12,88,157 has been made by Bombay Branch for processing marine products to the said sister concern. In this way total amount of Rs. 37,55,407 has been debited in the P L account on account of payment made or payable to Raymon Foods Ltd. The Assessing Officer further found that opening debit balance in the account of Raymon Foods Ltd. was Rs. 50,99,525. Thereafter two cheques of Rs. 50,000 each were issued as advance payment for processing charges to M/s. Raymon Foods Ltd. Thereafter three bills of processing charges were credited in the account. In this way every payment made in this account was shown as advance payment for processing even though the assessee was to recover huge balance from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se under consideration the amount paid to Raymon Foods Pvt. Ltd. is a concern of which factory has taken by the assessee on lease for processing its products. The payment made to M/s. Raymon Foods Pvt. Ltd. is the amount for the purpose of the business of the assessee. There is no finding of lower authorities that the borrowed capital was not for the purpose of business. Under the circumstances we are of the considered view that the interest paid on borrowed capital for the purpose of the business is allowable expenses under section 36(1)( iii ). Accordingly we set aside the orders of the lower authorities and the claim of the assessee is allowed. 31. The last ground raised by the assessee in its appeal is pertaining to reducing the claim under section 80HHC. It was pointed out that the Assessing Officer has adopted a wrong figure for calculating export incentive considering the amount of Rs. 24,53,033 instead of Rs. 29,45,242. It has been further pointed out that the Assessing Officer has not taken into consideration export income of Rs. 3,81,626 and freight and rebate of Rs. 1,10,583 as export incentive for calculating deduction under section 80HHC. Having heard both the side ..... X X X X Extracts X X X X X X X X Extracts X X X X
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