TMI Blog2011 (8) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... ER Per Mahavir Singh, JM The Hon ble President, Income-tax Appellate Tribunal, vide order dated 08.06.2010, constituted this Special Bench under section 253(3) of the Income Tax Act,1961(hereinafter called as the Act ) to consider and adjudicate following questions: 1. Whether Ld. CIT(A) erred in law as well as in fact in allowing deduction u/s. 80-IB to the assessee on the income earned from job work which comprises of repairs and maintenance? 2. Whether Ld. CIT(A) erred in law as well as in fact in treating the income from repairing and maintenance at par with the income from manufacturing for the purpose of Sec.80-IB? 2. The brief facts giving rise to above questions are that assessee filed its return of income on 28.10.2005 declaring total income at Rs.1,11,320/-. Assessee is a manufacturer of moulds for ball pen and mould parts in Union Territory of Dadra and Nagar Haveli. Assessing Officer issued notices under sections 143(2) and 142(1) of the I. T. Act, 1961 (hereinafter referred to as the Act ) requiring assessee to submit books of account and other related details. In response to notices, assessee stated that it is a manufacturing unit and has claimed deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 80-IB is identical in this matter with the disputes in assessment year 03-04 and 04-05. It is further seen that they have been adjudicated upon by the Hon ble ITAT in those assessment years in favour of the appellant. Respectfully following the order of the ITAT in the case of appellant in the assessment years, the present appeal is allowed. Aggrieved, revenue came in appeal before Tribunal and this appeal was referred to special bench by the order of Hon ble President. 3. Ld. CIT-DR Sh. D. R. Sindhal argued on behalf of revenue. He stated facts that amounts of sales, job work income, total deduction claimed by assessee u/s 80-IB of the Act and deduction u/s 80-IB of the Act on job work receipts for Assessment Years 2003-04, 04-05 and 05-06 are as under:- A.Y Sales Job work Income repair and maintenance charges Total 80-IB claim Amount of 80-IB claim on job work income 03-04 Rs.52,49,200/- Rs.1,34,12,290/- Rs.73,08,307/- Rs.44,82,673/- 04-05 Rs.80,86,500/- Rs.1,11,63,660/- Rs.72,94,272/- Rs.43,94,985/- 05-06 Rs.98,10,000/- Rs.96,01,410/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an undertaking engaged in activities listed in the relevant sections manufacturing or producing any article or thing. There is no dispute in the case that the appellant derives profit from manufacturing plastic moulds. It also cannot be disputed that plastic mould is an article or thing. The written submission on behalf of the appellant relies upon several authorities which hold that an article or thing manufactured on behalf of others on job work basis, is also manufacturing an article or thing. Although, the authorities rendered their judgments in the context of other sections, the expression interpreted by them is whether an article or thing is manufactured. Kerala High Court in the case of Forbes Ewart and Figgis Pvt. Ltd (supra) specifically considered whether manufacturing activity as job work on the raw material supplied by the other party would amount to manufacturing an article in terms of section 32A of the Act, It was held that intermediate items produced by any manufacturing activity which are used as components by another manufacturer in producing the final product for the market is also an article or thing, the portion of which would entitle the producer for relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us interpretation of job work charges by CIT(A) and also referred to the decision of Amritsar bench of ITAT and confirmed the order of CIT(A). Similarly, he narrated facts that Assessment order for Asstt. Yr. 2004-05 has also been passed by AO u/s.144 of the Act, as again assessee did not file required details and did not produce books of account. He stated that in this year also nature of job work charges remained vague, unclear and liable to be misinterpreted by CIT(A) as well as Tribunal relying upon their earlier orders for deciding appeal for Asstt. Yr. 2004-05. 4. He narrated facts from Asstt. Yr. 2005-06, that assessee took plea that there was fire in its premises and again many of details could not be furnished by the assessee. However, most importantly, during assessment proceedings of A.Y.2005-06, assessee filed cost break-up and the kind of work done in job work manufacturing which is as under:- Cost break-up: Jai Durgcs Engineering Company is manufacturing Plastic Moulds their components for writing instruments industries. Mould is heart of ballpen design it is a creative job. A mould is not similar to another mould hence cost of each mould vary with ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to industrial undertaking and that income by way of sale of import licence, export house premium and customs draw bock will not be entitled for deduction U/s.80J and 8OHH of the Act. He also referred to the case law of Hon ble Kerala High Court in the case of CIT Vs. Forbes Ewart Figgis (P) Ltd (1999) 238 ITR 762 (Ker), which contains issue of job work manufacturing and has no relevance to the facts of assessee s case. He stated that for claiming deduction U/s.801B of the Act there must be manufacture or production of a new article and there is overwhelming judicial opinion in favour of this proposition. For this, Ld. CIT-DR placed reliance on the case of law of Hon ble Apex Court in the case of Tamil Nadu State Transport Corporation Ltd v CIT (2001) 252 ITR 883 (S.C.), wherein it is held that tyre retreading does not amount to production and production means, which brings into existence a new article. When a tyre wears out, its life may be renewed by retreading but a different and distinct commodity cannot be said to have come into existence as a result of retreading and therefore, the business of retreading of tyres did not amount to production of a new article entitling assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CITDR referred to words used in Section 35B of the Act as manufacture and production . He referred to the case law of CIT v Tara Agencies (2007) 292 ITR 444 (SC), wherein Hon ble Apex Court has held that the activity of blending of tea will not amount to manufacture or production and therefore, Hon ble Supreme Court denied weighted deduction U/s.35B of the Act to assessee. He also referred to the decision of coordinate bench of this Tribunal, Chennai Benches in the case of DXN Herbal Manufacturing (India) Pvt. Ltd. v ITO (2009) 3l6 ITR (AT) 126 Chennai), wherein it is held that the activity of mixing of mushroom powder and putting them into capsules is neither manufacturing nor production of article and therefore, the assessee is not entitled to deduction U/s.801B of the Act. 6. Ld. CIT-DR further stated that recently Hon ble Delhi High Court, exactly on similar issue where after sales service, whether entitled to deduction u/s. 80HH and 80I of the Act was the subject matter in the case of Honda SIEL Power Products Ltd. v CIT (2009) 318 ITR 309 (Delhi), wherein it is held that assessee is not entitled to deductions U/s. 80 HH and 80 I of the Act on profits from sale of import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int with the help of special cutting machines and then rough turning is done on it with the help of turning machines. Thereafter it is given for furnace hardening. The hardening should be 42- 44 as per Rockwell Hardening Scale. Thereafter cylindrical grinding, surface grinding are done with the help of cylindrical surface grinding machines through specialized EDM drills. These pin points are now put to spark erosion with the help of sparking machines hard chromed. c) Guide Pins: For manufacturing of Guide pins EM36 steel are used it is cut to the size of the guide pins with the help of special cutting machines. Then rough turning is done on it with the help of turning machines. Thereafter it is given for furnace hardening. Thereafter cylindrical grinding, surface grinding are done with the help of cylindrical surface grinding machines. These guide pins are lubricated with special lubricants and grooves are attached. d) Guide/ Degree Bush: For manufacturing of Guide bush EM24 steel are used it is cut to the size of the guide bush with the help of special cutting machines. Then rough turning is done on it with the help of turning machines. Thereafter it is given for fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltas. Similarly Hewlett Packard (HP) manufactures computers and computer parts like motherboard, CPU, hard disk, screens, keyboard etc and it sells fully assembled computers as well as its parts. According to him both sales are sales of manufactured items only but in case customer gets hard disk of computer replaced, it may be repair work for the customer but it is a sale of manufactured part (hard disk) for HP. He also referred to the contrary, that if a person buys hard disk from market and replaces the same in the computer of a customer, the same may be termed as repairing activity. In view of this he argued that supplying of manufactured parts in the course of after sales service is very much manufacturing activity. He stated in reference to the Special Bench that issues framed by revenue predicates that income shown to have been earned from job works in fact represents assessee s income from repairs and maintenance but this premise is far from facts. He stated facts that assessee provided after sales service to its valued customers, which is essential for selling moulds. After sales service is an exclusive service to its own customers and it is not that assessee carries on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the need arises provide after sales service and repair such products for their continued efficient use. Admittedly, all these activities are carried out by the undertaking itself and only supplement the manufacturing activity being carried out by the undertaking. Thus, the essential ingredient of nexus between the profit and the undertaking gets established. There is no infirmity in the order of the CIT(A) for allowing deduction under s. 80-IB even in respect of profits derived from training of customers employees and after sales services and repairs . Ld. Counsel for the assessee also referred to the decision of Ahmedabad Bench of ITAT in the case of DCIT Vs. Mira Industries 87 ITD 475 (Ahd), wherein similar view is expressed 8. Ld. Counsel for the assessee further referred to the decision of Amritsar Bench of ITAT in the case of Saraf Electricals (P) Ltd (supra), wherein it is held manufacturing new items and servicing used ones needing debugging after operation for a time involving the use of same machinery required for manufacturing, in such situation, repair is no different from manufacturing. He drew support from CIT v. Tamil Nadu Treatment Testing Services (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into Section 2(r) of the Special Economic Zones Act 2005 with effect from 10.2.2006. According to him, selfsame definition has been incorporated in Section 10AA of the Act by reference to said section 2(r) of SEZ Act and changed its definition in Exim Policy. The definition in section 2(r) reads as under: Manufacture means to make, produce, fabricate, assemble, process or drawing into existence by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, polishing, blending, reconditioning, repair, cutting, refurbishing, testing calibration, reengineering. Manufacture for the purpose of this policy shall also include agriculture, aquaculture, animal husbandry, floriculture, pisci-culture, paultry, sericulture, viti-culture and mining . In view of the above, Ld. Counsel for the assessee argued that one striking aspect in this connection is that it is clause (c) of schedule of the SEZ Act that has inserted Section 10AA after Section 10A of the Act and Clause (iii) of Explanation 1 below sub-section (9) of Section 10AA contains the definition of manufacture by reference to Section 2(r) of the SEZ Act 2005. It read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified area identified backward areas in the case of 80-IB and special economic zones demarcated by the SEZ Act 2005 for section 10AA. He stated that only additional angle for section 10AA of the Act is that the industrial undertaking has to be 100% export-oriented, but that does not impair the fundamental unity or equation of two provisions. According to him, section 5 of the SEZ Act sets out as guidelines for notifying Special Economic Zone of which the primary factor among other factors is generation of additional economic activity and again, under its section 6, the zones are to be demarcated as processing and non-processing areas. The processing area means area for setting up Units for activities, being the manufacture of goods, or rendering services; or (b) the area exclusively for trading or warehousing purposes; while the non-processing area are for activities other than those specified under clause (a) or clause (b). He argued that the pertinence of the provisions of SEZ Act lies in demonstrating the kindred nature of the two provisions of the Act where both have as the presiding object the spread of the activity of manufacture and generation of economic activity in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another decision of Hon ble Kerala High Court, viz., Girnar Industries Vs. CIT (2010) 230 CTR (Ker) 401, (2010) 187 Taxman 136, wherein it took the view that in the absence of definition of manufacture in 10A of the Act, aid can be taken from its definition in Section 10AA of the Act. Ld. Counsel finally argued that since definition of manufacture in Section 10AA of the Act includes repair as one of the parameters of the expression manufacture , it is only fair, reasonable and irresistible that repair should also be taken as a parameter of manufacture for the purpose of Section 80-IB of the Act. There is nothing in the object of Section 80-IB of the Act, which can be said to be repugnant to the object of Section 10AA of the Act. Both provisions stand on equation in regard to the basic nature of the objects, i.e., growth of industry - one, for the purpose of export development and the other for the purpose of removing the pockets of industrial backwardness of the national economy. So, they are public interest provisions and fundamentally marked by a common trait of betterment of national economy. Ld. Counsel for the assessee finally relied on settled law that a provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mirza Ataullaha Baig Anr. (1993) 202 ITR 291, Oudh Sugar v. CIT 222 ITR 726, CIT v. Lokmat News Papers Pvt. Ltd. (1995) 216 ITR 199. In view of this, Ld. Counsel stated that cumulative effect of judicial principles clearly indicates contra-indication for the case sought to be made out against assessee and even in the absence of definition of manufacture, liberal construction requires that repair by way of after-sale service as the integral part of manufacture. It is empiric axiom that all manufacturers provide customers using their products after-sale service, so to construe such after sales service as part of manufacturing activity is quite reasonable. 11. Ld. Counsel for the assessee distinguished case laws cited by revenue of the Supreme Court in Tamil Nadu State Transport Corporation Ltd. (supra) as well as the decision of the Kerala High Court in Vijaya Retreaders (supra), wherein it has been held that tyre-retreading is not production. In the above cases assessees were not the manufacturers of tyres or retread rubber. They were purchasing retread rubber from tyre manufacturers and pasting the same on the worn tyres. As such they were not manufacturers. This decision is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g activity. However in the case of the assessee it sells parts manufactured by itself. As such this case also does not apply to the assessee. He tried to negate the argument of revenue that tax deduction at source is a proof that payments made by parties are not for sale of manufactured goods but for repair and this inference is totally inconsistent with realities. The assessee claimed that manufacture is part of job work, i.e. of materials supplied by other parties for moulds to be manufactured by assessee. The assignment of such job work is treated as contract and tax deduction has no bearings, whether assessee received payments for job work done or repair work. Tax deduction proves nothing to disentitle assessee from benefit of deduction u/s 80-IB of the Act. In view of the above, since the assessee is not carrying out any repair work, it is the manufacturer of moulds and mould parts and providing after sales service to its customers, the entire profit is derived from manufacturing activity only and as such is entitled to deduction u/s 80-IB of the Act on its entire income. So, whole dispute is superfluous. Moreover in view of settled principle of law to interpret provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking Section 80-IB was introduced w.e.f. 1.4.2000 by the Finance Act, 1999 as a result of substitution of the then existing section 80-IA of the Act. The scope and effect of the introduction of section 80-IB by the Finance Act, 1999 has been clarified in the departmental circular no.779 dated 14th September, 1999, which was further amended by Finance Act, 2000 w.e.f. 1.4.2001, by Finance Act, 2001 w.e.f. 1.4.2002, by Finance Act, 2002 w.e.f. 1.4.2003, by Finance Act, 2003 wr.e.f. 1.4.2004 and by Finance Act, 2004 w.e.f. 1.4.2005. The scope and effect of the above stated amendments have been made clear by Board Circular no.795 dated 9 th August, 2000 vide para 37, 37.2, 37.3 and 37.4 as under: 37. Tax holiday in respect of undertakings set up in industrially backward States and Union Territories of the Eighth Schedule and industrially backward districts extended up to 31st March, 2002.- 37.1 Under the existing provisions of section 80-IB of the Incometax Act, 1961, a deduction is allowed, in computing the taxable income, in respect of profits derived from a new ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd if the interpretation sought to be placed by Ld. Counsel for assessee is accepted, then it might possibly lead to a situation where profits from repairs and maintenance apart from job work for which industrial undertaking has been set up for manufacturing may undertake very little manufacturing in an assessment year but assessee yet claimed deduction from the profits and gains of business including repairs and maintenance. We find in the context of section 80-IB of the Act and that of section 80-HH and section 80-I of the Act are inasmuch as are in parametria, because in both sections 80-HH and 80-I of the Act uses the expression profits and gains derived from an industrial undertaking , the burden is on assessee to show that income earned from an activity, the profits from which are claimed to qualify for deduction has immediate and direct nexus to essential activity of the industrial undertaking. In this context, Hon ble Apex Court in the case of Pandian Chemicals Ltd. Vs. CIT (2003) 262 ITR 278 reiterates this distinction and insist that only such business profit that have a direct nexus to the essential business activity of assessee, can qualify for deduction u/s. 80-HH o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o several decisions of the Madras High Court in order to contend that the word derived from could be construed to include situations, where the income arose from something having a close connection with the industrial under- taking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of Pandian Chemicals Ltd. [1998] 233 ITR 497. We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd.'s case [1998] 233 ITR 497 with respect to those decisions to hold that they do not in any way allow the word derived in section 80HH to be construed in the manner contended by the appellant. The learned counsel for the appellant then contended that having regard to the object with which section 80HH was introduced in the statute book, this court should give a liberal interpretation to the words in a manner so as to allow such object to be fulfilled. The rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation as submitted by the appellant. In the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of the words derived from in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word democracy is derived from the Greek word demos the people, and most dictionaries will so state. That is the ordinary meaning of the words derived from and there is no reason to depart from that ordinary meaning here. 12. Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined, or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not derived from refining of crude petroleum . The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining, or cracking, of raw naphtha resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to in the case of Cambay Electric Supply Co. Ltd Vs. CIT (1978) 113 ITR 84(SC), wherein it is held that the expression attributable to was wider in import than the expression derived from . The expression of wider import, namely, attributable to, was used when the legislature intended to cover receipts from sources other than the actual conduct of the business. But in the present case before us, the assessee s source of income is from repairs and maintenance i.e. after sale services and it may have commercial connection between the profits earned and the industrial undertaking but industrial undertaking itself is not the source of this profit. This profit from repair and maintenance earned by assessee is not a direct yield from industrial undertaking as the word used in section 80-IB of the Act of profits and gains derived from. 16. Another facet of the argument made by the assessee is that since the definition of manufacture in section 10AA includes repairs is one of the parameters of the expression manufacture, we have considered that the definition of manufacture has been bodily lifted into section 2(r) of the SEZ Act, 2005 w.e.f. 10.2.2006. We have gone through the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooling coil, body of air-conditioner and other parts but sells complete air-conditioning machines as well as parts. He referred that in case air-conditioning machines and its compressor is replaced, the activity may be repair for customer but same is sale of manufactured parts for Voltas. We have no quarrel over the proposition and in case the assessee is selling moulds manufactured by it and spare parts of moulds also sold for doing repairs and maintenance, qua sale of moulds and spare parts of moulds assessee is entitled for deduction u/s. 80-IB of the Act. But in respect to repair of moulds, it charges two types of receipts i.e. receipt on account of sale of spare parts as well as repairs and maintenance charges, in case of sale of spare parts assessee is entitled for deduction u/s. 80-IB of the Act but in respect to repairs and maintenance charges it is not entitled for deduction in view of clear provisions of section 80-IB of the Act, because that receipt has no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Reference made by Ld. Counsel for assessee of Woodword Governors India (P) Ltd. (supra) of Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of imported gensets on the ground that the profits therefrom could not be considered to be income "derived" from the industrial undertaking. This was upheld by the Tribunal. Hon ble High Court dismissing the appeal held as under: (i) that the Tribunal was right in law in upholding the order of the Assessing Officer reducing the profit earned on sale of spare parts and imported gensets from the income of the eligible undertaking(s) for the purpose of computing deductions under sections 80HH and 80-I. (ii) that sale of imported spare parts used in providing after-sales service to customers might be incidental to the business activity of the assessee but had no direct nexus with the activity of the industrial undertaking which was the manufacture of gensets. Profits from such sale were not entitled to special deduction under sections 80HH and 80-I. We find from the above decision of Hon ble Delhi High Court that no doubt the issue was profit from sale of imported machinery and spare parts but also charges for providing after sales services and Hon ble Delhi High Court has negated the claim of assessee in terms of above. 18. Now we will conclude our decision in terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income earned from an activity, the profits from which are claimed to qualify for deduction, has an immediate and direct nexus to the essential activity of the industrial undertaking. Hence, our answer to first question referred is that the assessee is entitled for deduction u/s. 80-IB on income earned from job work charges but excluding repairs and maintenance charges. Our answer to second question referred is that the income from repair and maintenance cannot be treated at par with the income from manufacturing for the purposes of deduction u/s. 80-IB of the Act. iv) That the assessee in the present case has earned income from job work which comprises of repairs and maintenance, it has two limbs that the income from job work is to be allowed as deduction in terms of section 80-IB of the Act but income from repairs and maintenance cannot be equated at par with income from manufacturing and hence not eligible for deduction in terms of section 80-IB of the Act. In the present case, assessee is a manufacturing unit and has claimed deduction u/s. 80-IB of the Act on job work charges including repairs and maintenance. As stated by assessee, it failed to produce details as fire broke ..... X X X X Extracts X X X X X X X X Extracts X X X X
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