TMI Blog2010 (2) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... . Padvekar, Judicial Member The appeal has been filed by the assessee challenging the impugned order of the learned CIT(A)-XVIII, dt. 23rd Nov., 2004 for the asst. yr. 2001-02. 2. The assessee has taken the following grounds : "1. On the facts and circumstances of the case and in law the learned CIT(A) erred in confirming conclusion of the AO that the appellant did not fulfil the prescribed conditions under s. 80-IB(2) in respect of his proprietary business of Environmental Research Technology (India) (ERT) and the learned CIT(A) further erred in confirming disallowance of deduction under s. 80-IB of Rs. 30,93,429 in respect of profit of the said proprietary business. 2. The learned CIT(A) erred in confirming action of the AO of rejecting submission of the appellant that ERT carried on manufacturing with use of power and required to employ only ten workers in accordance with s. 80-IB(2)(iv) to be eligible for deduction under s. 80-IB, 3. Without prejudice to above it is further submitted that the learned CIT(A) erred in rejecting submission of the appellant that the appellant had substantially complied with the requirement of s. 80-IB. 4. The learned CIT(A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery and hence without the machinery, there cannot be the industrial undertaking. Secondly, the assessee has not employed the requisite number of workers, which as per the AO as the assessee is not using the power, then he is under statutory obligation to employ minimum 20 workers every month to be eligible to claim deduction under s. 80-IB. The AO has also observed that the assessee has not deducted any PF or ESI contributions from the wages paid to the employees and hence, in view of the AO, it is very much necessary to establish the relationship between the employer and employee. The AO has also noted that the assessee has not complied with the statutory requirement as per the various Acts, like Minimum Wages Act and other Labour Acts etc. In the opinion of the AO even the assessee should have kept the muster roll, which has been backed with supporting evidences in the form of statutory documents, identity of persons involved in the production, photographs and signature on the Revenue stamp, then, the claim of the assessee that more than 20 workers were employed would have been in a sound base. In absence of the same, the AO held that the condition of employing 20 or more w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO to establish that he was employing 20 or more workers regularly. In such facts and circumstances, the appellant has clearly not fulfilled this specific requirement and can, therefore, not be allowed the benefit of deduction under s. 80-IB. 3.1 It is also to be noted that deduction under s. 80-IB is allowable only to industrial undertakings. The normal understanding of an industrial undertaking would imply that is engaged in the manufacture or production of certain articles or things. In the instant case, it is clear, and this fact is admitted by the appellant himself, that his unit does not have any plant or machinery which is utilized for manufacturing or processing. The appellant simply assembles various components through use of manual labour and tools and implements without any machinery being used or any power being consumed. On facts this is not denied. It is, therefore, clear that the appellant is not engaged in the manufacturing or processing of any article or thing and on this ground also, therefore, it will not be entitled to any deduction under s. 80-IB. 3.2 It is also claimed that if the appellant were to get the items manufactured by outside units, which it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and submitted that the assessee has made the substantial compliance even in respect of the number of workers and it is clear from the figures given by the AO in the assessment order. It is argued that when some work is outsourced, in that case, the contract labour is employed and nowhere it is required that the assessee must himself employ the employees. What is contemplated is that overall the direct or indirect employment should be more than 20. In support of his contentions, the learned counsel relied on the decisions of the Hon'ble High Court of Bombay in the cases of CIT v. Harit Synthetic Fabrics (P.) Ltd. [1986] 162 ITR 640/26 Taxman 540 (Bom.) and also CIT v. Ormerods (I.) (P.) Ltd. [1989] 176 ITR 470/42 Taxman 81 (Bom.). It is further argued that as per the notification issued under the Central excise that the assessee was not required to pay the excise duty and hence, the AO as well as the CIT(A) erroneously concluded that as the excise duty was not payable, hence the assessee is not involved in the manufacturing process. The learned counsel also referred to copy of the Circular No. 659/50/2002-CX, dt. 6th Sept., 2002 which was issued by the Government for exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assembly. 9. It is not disputed before us even by the learned counsel that the major components required for assembly or production of the system or equipment are either purchased in the market as well as the production of the same is outsourced and got manufactured from the other parties. The learned counsel relied on the decision of the Tribunal, Chandigarh in the case of Sond Bharat Pedals (India) ( supra ). In the said case, the controversy was identical with present issue before us that whether the assessee was engaged in the manufacturing or production of the articles. In the said case, the assessee was producing the bicycle pedals. It was noticed that M.S. rounds and M.S wires were purchased by its own which were given to outside fabricators for converting into pedal axles and pedal rods on payment of labour charges. Thereafter, finished components of pedal axles and pedal rods were sent to another fabricator for heat treatment of nickel plating. The assessee also purchased some more components like pedal rubber, pedal cup, pedal cap, steel balls, washers etc. The claim of the assessee under s. 80-IB was denied on the reason that the said assessee was not engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee : ( i ) Griffon Laboratories (P) Ltd. v. CIT [1979] 119 ITR 145 (Cal.) where the High Court held that the Tribunal was not correct in holding that assessee must own or possess the manufacturing plant or machinery before it could be said to be a manufacturer of goods. ( ii ) CWT v. Smt. Premlatabai [1982] 31 CTR (MP) 188 : [1982] 137 ITR 329 (MP) in this case the assessee purchased raw cotton, got it ginned and pressed in factories through outside agencies and then packed the same into bales before putting them for sale. The Madhya Pradesh High Court held that the undertaking need not itself carry out the entire processing of goods and part of the processing can be carried out by outside agency and therefore, the assessee was entitled to exemption mentioned in s 5(1)(xxxi) of the WT Act. ( iii ) CWT v. Mubarak Ali Khan [1980] 123 ITR 101 (All) in this case, assessee was engaged in the business of manufacture of bidis for which the assessee purchased tendu leaves and tobacco. These were given to contractors for getting the bidis manufactured. On these facts the Allahabad High Court held that the assessee was an industrial undertaking for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This submission has not been controverted by the Revenue. Thus the assessee fulfilled all the conditions laid down in s. 80-I and, therefore, was an industrial undertaking engaged in the business of manufacturing cycle pedals." 10. In the case of Rashron Heavy Engg. (P) Ltd. ( supra ), the identical issue was involved as in the said case, the assessee manufactured plate bending machines by getting various components manufactured by other manufacturing units. The assessee's claim under s. 80-I was denied. When the matter reached before the Tribunal, the claim of the assessee was accepted by giving the following reasons : "In the P L a/c the sales have been shown at Rs. 2,29,978 against which raw materials and components consumed are shown at Rs. 1,94,587. This figure has been arrived at by deducting closing stock of raw materials and components (Rs. 1,61,675) from the purchase price of raw materials and components including job work charges of Rs. 55,000 at Rs. 3,56.262. The details of raw materials purchased had been given before the AO and the same have also been filed in the paper book. The memorandum of association of the assessee empowers the assessee to carry on the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim the status of industrial company and claim benefit of concessional rate of tax." 11. Nowhere, it is the case of the AO that readymade units are bought by the assessee and are sold. Admittedly, as per brochure, we are examining on record, i.e. different components are required for making of the unit. As per the product's brochure filed on record which is also otherwise not controverted by the learned Departmental Representative, the main use of the equipment or system made by the assessee is to maintain the level of the fluoride and also remove the suspended solid in the water. Merely because some raw material is readily purchased from the market and some raw material is got manufactured by outsourcing, but when the final product is made by the assessee himself, it cannot be said that the assessee is not engaged in the manufacturing. Admittedly, the new product is made by the assessee. Moreover, the assessee's case is supported by two decisions of the Co-ordinate Bench i.e. Sond Bharat Pedals (India) ( supra ) and Rashron Heavy Engg. (P) Ltd. ( supra ). 12. So far as the issue of payment of the excise is concerned, we have perused the Circular No. 659/50/2002-CX, dt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edural provisions. Therefore, we need to examine what these provisions prescribe for 'computation of profits of the eligible business'. It is evident that s. 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words 'derived from' are narrower in connotation as compared to the words attributable to'. In other words, by using the expression 'derived from'. Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is whether the DEPB credit/duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt does not come within first degree source as the said incentives flow from incentive schemes enacted by the Government of India or from s. 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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