TMI Blog2013 (9) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it has been held that disallowance u/s 14A of Act requires a clear finding of incurring of expenditure and that no disallowance can be made on basis of presumptions – Decided in favor of Assessee. Payment of sales commission - payment to third parties - Genuineness - Disallowance u/s 37 - Requirement of TDS u/s 195 – Held that:- Reliance has been placed upon judgment in case of CIT Vs Chandulal Keshavlal and Co. [1960 (2) TMI 1 - SUPREME Court], wherein held that if expense incurred for fostering business of another only or for some improper or oblique purpose outside course of business then expense not deductible. In deciding whether a payment of money a deductible expenditure one has to take into consideration questions of commercial expediency and principles of ordinary commercial trading. If payment or expenditure incurred for purpose of trade of assessee it does not matter that payment may incur to benefit of a third party. Another test whether transaction properly entered into as a part of assessee's legitimate commercial undertaking in order to facilitate carrying on of its business; and it immaterial that a third party also benefits ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction u/s 10B for 100% EOU - By Finance Act, 2000, definition of 'manufacture' which included 'processing' contained in section 10B of Act was deleted w.e.f. 01.04.2001 – Held that:- Reliance has been place upon judgment in case of Commissioner of Income-Tax Versus Tara Agencies[2007 (7) TMI 4 - SUPREME COURT OF INDIA], wherein it has been held that blending of tea does not amount to 'manufacture' or 'production' of an article, but only processing – In present case, assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division - Assessee's unit engaged in export of tea bags and tea packets was a 100% EOU – Reliance has also been placed upon judgment in case of Madhu Jayanti case[2012 (7) TMI 531 - ITAT KOLKATA ] – Exemption u/s 10B allowed. Whether assessee has set new units or has merely reconstructed business which was already in existence – Held that:- CIT(A) had referred to only a few correspondence exchanged with Panchayat to make a case that it was only some repairs or at best a renovation work undertaken at Amona, whereas several other piec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) erred in confirming the disallowance made by the A.O., u/s. 40(a)(i) of the Act, of the expenditure of ₹ 36,05,767/-incurred by the Appellant by way of payment of demurrage to the non-resident Buyers of iron ore. 4. The Learned CIT(A) erred in confirming the disallowance by the A.O. the expenditure of ₹ 1,19,70,782/- towards demurrage on ships payable to the non resident ship-owners, having failed to appreciate that neither the provisions of section 195 nor section 40(a)(i) were applicable to such tax payments. 5. The Learned CIT (A) erred in holding that the Appellant's claim for deduction of expenditure towards payment of the Education cess and the Secondary and High Secondary Cess of ₹ 19,72,00,814 /-, was not maintainable. 6. The Learned CIT(A) erred in holding that the Appellant is not eligible for deduction u/s. 10B of the Act, totaling ₹ 257,23,14,771 in respect of its 100% Export Oriented Unit at Amona in Goa. The CIT(A) ought to have appreciated the unit set up in the year 2002-03 satisfies the condition of new undertaking as required under section 10-B of the Act. 7. The Learned CIT(A) erred in holding that the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ields of natural or applied science including agriculture, animal husbandry or fisheries. The case of the assessee is clearly not covered under this definition. Moreover, the assessee has also not taken approval of the designated authority that this activity tantamount to scientific research. For the A.Y. 2006-07 also same issue was confirmed by CIT (Appeal). 3. The learned CIT (A) has failed to appreciate the Disallowance of Foreign exchange notional loss/loss on forward contracts to the tune of ₹ 1,59,00,000/-. Board's Circular No. 23 (XXXIV-4) D of 1960 dated: 12/09/1960 and Instruction No.3 - 2010 dated: 23/03/2010 clearly says that the losses incurred by the assessee on forward contracts is to be treated as speculative loss and not hedging loss. 4. The learned CIT (A) has failed to appreciate the addition with respect to Expenditure incurred in respect of issue of Bonus Shares to the tune of ₹ 61,35,482/-, which is mainly related to expansion of capital base and therefore it is in the nature of capital expenditure but not revenue expenditure. 5. For this and other grounds that may be urged at the time of hearing, it is prayed that the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h does not or shall not form part of the total income appearing in the balance sheet of the assessee on the first day and the last day of the previous year Rs.20,00,44,93,634 + ₹ 30,19,67,88,502 = ₹ 50,20,12,82,136/- Average of the above = ₹ 25,10,06,41,068/- C. The average of total assets as appearing in the balance sheet of the assessee, on the first day of the last day of the previous year - Nil (i) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. = ₹ 25,10,06,41,068x.005 = ₹ 12,55,03,205 Less: Administrative expenditure already disallowed by the assessee ₹ 25,78,156 Rs.12,29,25.049 Accordingly, a sum of ₹ 12,29,25,049/- is disallowed u/s 14A read with Rule 8D as expenditure incurred for earning the exempted income and same is added to the total income. 6. The assessee went in appeal before the CIT(A). The CIT(A) confirmed the disallowance by holding as under: 4.1 During the appellate proceedings, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the quantification of the expenditure relating to the tax exempted income made by the assessee. Before proceeding further it will be relevant to examine the provisions of section 14A providing for disallowance of expenditure relating to exempt income. Section 14A: For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee. is not satisfied with the correctness of the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used by the company for such investments and hence no disallowance of interest u/s14A was called for. 4.4 On careful consideration of the facts of the case, it is observed that there is an inherent contradiction in the submissions made by the assessee. While on one hand the assessee vehemently claims that no direct expenditure was incurred to earn the dividend income, on the other hand it had quantified certain expense on a notional basis which could relate to earning of dividend income from such investments. The fact, that the assessee had made an notional disallowance of ₹ 25,78,156/- as the estimated administrative expenditure relatable to the earning of dividend income, shows that it was only an adhoc quantification of the expenditure without having any direct co-relation with the actual expenditures incurred. In this regard it is relevant to refer to the annexure submitted by the assessee during the scrutiny proceedings, furnishing details of the computation of the amount ₹ 25,78,156/-. From the information furnished in the annexure, it is clearly noticed that for the purpose of allocation of expenditure relating to the exempt income, the assessee has consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, PF etc, which alone accounted for 38% of the total administrative expenditure, has not been made on a proportionate basis. No justification has been adduced in this regard. If the total salary expenditure of ₹ 21.85 crores is allocated on a pro rata basis, the proportionate amount relatable to dividend income will be ₹ 62.10 lacs instead of ₹ 17.03 lacs, as computed by the assessee in the annexure. This clearly shows that the basis adopted by the assessee for quantification of the expenditure incurred in relation to the exempted income is grossly flawed and erroneous. Further, it is also seen that the sales and other receipts of the assessee, excluding dividend income is around ₹ 4853 crores. The average value of the investments as per the balance sheet is found to be ₹ 2510 crores. Put together, the total turnover including investment in mutual funds comes to ₹ 7363 crores approximately. Therefore, if the total administrative expenditure of ₹ 56.59 crores is allocated on a proportionate basis, the expenditure incurred in relation to the dividend income shall amount to ₹ 19.29 crores. As against this, the assessee had computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of these cases it is observed that these decisions relate to the assessment year 2004-05 and 2000-01 respectively, which was prior to the insertion of rule 8D. Careful reading of both section 14A(2) as well as rule 8D(1) clearly brings out that the Assessing Officer can derive jurisdiction to invoke the provisions of this section only if he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure, which the assessee claims to have incurred in relation to the exempt income. Section 14A clearly mandates that once the Assessing Officer is satisfied that the claim of the assessee is not correct, he has no other option but to invoke the methods prescribed in Rule 8D for quantifying the expenditure incurred in relation to the exempt income. In the present case, there are more than sufficient reasons, as discussed above, for the Assessing Officer to reject the claim of the assessee. In view of the glaring errors as discussed above, the Assessing Officer is fully justified in invoking the provisions of I.T. Rule 8D for quantifying the expenditure incurred in relation to the exempt income. Admittedly, the assessee has not raised any objection a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale of gases 36427301 10045 4456 10842 Hire Charges of Barges 25362117 6994 3102 7549 Proceeds from various services 114783174 31652 14040 34164 Interest 428301292 118107 52389 127478 Dividends 1427251668 393575 174578 424801 1703935 Profit on sale of assets 629444 174 77 187 Other receipts 14278125 3937 1746 4250 Profit on sale of investments 301014801 83007 36819 89593 Provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the year and a disallowance of ₹ 12,29,25,049/- was made. It was pointed out that the AO made following averments: - a) No administrative expenditure was incurred on earning of dividend income. b) The disallowance made by the assessee towards administrative expenditure is very low considering the magnitude of the investments and dividend income received. c) An investment of this magnitude cannot be made without a proper analysis of the market condition/stock movement. The Ld. AR drew our attention towards the findings of the CIT (A) and stated that CIT (A) in brief gave the following findings:- a) There is an inherent contradiction in the submissions of the assessee. On one hand it argues that no direct expenditure was incurred to earn dividend income and on the other hand it quantified certain expenses on a notional basis. b) The assessee has considered expenses only under three heads, i.e., (a) maintenance of office equipments, (b) printing and stationery, and (c) postage and telephone. Other administrative expenses were not considered by the assessee for allocation and no specific reasons have been furnished for the same. c) The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied when investments are yielding taxable income as well. Further only few transactions of purchase and sale have been undertaken by the assessee. The assessee need not spend day to day time to decide about the investments as the assessee has not churned out / shifted the investments on daily / regular basis. It can be seen that once an investment is made, it lies there; just a few of them were sold to encash profit on them and which was subjected to capital gains tax. Only one person was full-time engaged for the investment activity and who used to analyse various options and then the decision to invest was taken by the CFO and approved by the Managing Director. Therefore, the assessee itself disallowed u/s 14A the salary of the said persons to the extent of their involvement in the activity of investments as mentioned on Page No. 109 of (Initial) PB Vol. l. However, CIT (A) presumed that each staff and personnel was participating in the investment activity and probably therefore felt the need to allocate the entire salary in some proportion. But this proposition is prima facie fallacious since all employees are not supposed to undertake or be engaged in each and every busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the assessing officer about the incorrectness of the claim of the assessee in respect of the expenditure relating to the dividend income should be with regard to the accounts of the assessee. No such satisfaction has been arrived at by the assessing officer. He has not rejected the accounts of the assessee. He has not pointed out any mistake in the accounts of the assessee. The Ld. A.R. in this regard relied on the decision of the jurisdictional High Court in the case of Godrej Boyce Manufacturing Company Ltd. Vs. DCIT 328 ITR 81 (Mum.). 11. Rule 8D provides for the computation of the disallowance in this connection, only if the assessing officer, having regard to the accounts of the previous year is not satisfied with the correctness of the claim of the expenditure computed/worked out by the assessee. The assessing officer must, in the first instance determined whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the assessing officer must be arrived at on an exact basis. The CIT (A) concluded that the assessee made a contrary claim that no administrative expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be appreciated that the intention behind provisions laid down in Rule 8D is not to embark upon an unwarranted high level of disallowance of expense when the available facts and circumstances do suggest otherwise. 12. Reliance was placed in this regard on the decision in the case of CIT Vs. Jindal Photo Ltd. in ITA No.4539/DLl/010 dated 7/1/11 for the proposition of the law that the assessing officer must record his dissatisfaction about the claim of the assessee regarding computation of expenses incurred for earning exempt income with regard to the accounts of the assessee. No ad-hoc disallowance can be made. Again Delhi Bench of this Tribunal for the assessment year 2008-09 in the case of the same assessee i.e. DCIT Vs. Jindal Photo Ltd. vide order dated 23/9/2011, the Tribunal followed the same principle and took the view that a mechanical application of rule 8D is not permissible. The onus is on the assessing officer to record, his satisfaction as to the incorrectness of the claim of the assessee about the expenses incurred in relation to the exempt income and assessing officer has to establish a clear finding of the expenses incurred in relation to the exempt income. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment and dividend income received. The disallowance made by assessee u/s. 14A of the Act towards administrative expenditure is low on comparing the magnitude of purchase and sale made by the assessee and investment of large magnitude cannot be made by proper analysis of the market condition stock movement etc. Appellate Commissioner confirmed finding of the Assessing Officer that having regard to the accounts of the assessee is not satisfied with the correctness of the claim. Submission of the assessee on the one hand that there was no administrative expenditure and on the other hand there was administrative expenditure which was worked out on notional basis is self contradictory. Ad-hoc administrative expenditure worked out by the assessee on maintenance of office equipment , printing and stationery and postage and telephone . Other administrative expenses such as:- Professional legal charges Rs.23.56 crores Auditors fee Rs.0.53 crores Travelling and representation expenses of Directors Rs.4.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mft Co. Ltd. Vs. DCIT Anr. 5. (1962) 44 ITR 739 (SC) CIT Anr. VS S.V. Angidi Chettiar 6. (1958) 33 ITR 182 (SC) CIT Vs. McMillan Co. 7. (2005) 278 ITR 3 (GUJ) CIT Vs. Parmanand M. Patel 14. We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year begin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend income received, the AO was of the view that the disallowance made by the assessee u/s 14A of the IT Act towards the administrative expenditure is low on comparing the magnitude of purchase and sales made by the assessee and the investments of large magnitude cannot be made without proper analysis of the market condition/stock movement etc. The revenue was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum). 15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was made in earlier years and (iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) (3) of Sec.14A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income, if such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was pointed out. The assessing officer in our opinion in view of the jurisdictional High Court decision is bound to record satisfaction as to how the expenses claimed by the assessee have been incurred on earning dividend income were not sufficient and correct. We have already held that the onus to prove in this regard lies on the assessing officer. Although the Ld. DR had vehemently contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying on the decision of CIT(Appeal) in respect of Explanation bb to sec. 80HHC that 10% of the receipts under the sources mentioned therein are deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment Ltd., 10 SOT 284 (Del); and 3. D.J. Mehta Vs. Income Tax Officer, 290 ITR 238 (Mum.) (AT) In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected. In the case of Jindal Photo Ltd. Vs. DCIT held in I.T.A.T. Delhi bench dated 23.9.2011 it was held as follows: In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee's calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A), therefore, erred in partially approving the action of the Assessing Officer. In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (IT. Act No.5779/Mum/2006 208/Mum/2009) it was held as follows: At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon'ble Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon'ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as welt as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered the submissions made by the assessee and the observations of the assessing officer. I have also perused the order of the Hon'ble ITAT in ITA. No. 113/PNJ/2010, dated 10.3.2011 in assessee's own case for the assessment year 2005-06, in which the similar issue was considered. With regard to the controversy whether the assessee is required to deduct tax at source for the commission paid to the non-resident agents, the Hon'ble tribunal has decided the issue in favour of the assessee in the above referred appeal. In this regard it is held that circular no. 7 of 2009 withdrawing the circular no. 23 of 1969, 163 of 1975 and 786 of 2000, will be operative only from 22/10/2009 and not prior to that date. It was accordingly held that the circular is not applicable for the year under consideration, i.e., 2005-06 and accordingly the appeal of the assessee was allowed. Following the ratio of this decision, circular no. 7 of 2009, which was held to be operative only from 22/10/2009, should have no application to the present case which relates to the financial year 2008-09 relevant to the assessment year 2009-10. Accordingly, following the decision of the Hon'ble IT AT, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07. For the year under consideration, assessee has paid commission of ₹ 8,26,79,634/- to M/s Mitsui Co. Ltd., Japan and ₹ 54,90,159/-to M/s Omega Pvt. Ltd., Karachi, Pakistan. The balance amount of the claim represents service tax. During the course of appeal proceedings, the assessee had furnished copy of agreement dated 26.07.2007 between Sesa Goa Ltd. and Omega Pvt. Ltd. and a copy of an Addendum agreement between Sesa Goa Ltd. and Mitsui Japan. The assessee has also relied on extracts of e-mails exchange between the appellant and the sales agents to substantiate the nature of services rendered by the sales agents. However, it is important to note that the claim of payment of commission to the extent of ₹ 9.88 crores cannot be justified merely by relying on copies of agreements or e-mail extracts. It is not disputed that M/s Mitsui Co. or M/s Omega Pvt. Ltd. are known entities as far as the assessee is concerned. It is possible that the assessee may have some kind of business relationship with the above two companies. It is also possible that there may be some correspondence with the two companies with regard to sales of iron ore abroad. But this shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting iron to this concern for substantially long time, which should normally not require any sales promotion. Considering the facts of the case as discussed above, the assessee has not been able to substantiate the claim for payment of commission to non-resident agents by adducing specific and tangible evidence to demonstrate that services were rendered by the sales agents to justify commission payment as claimed by the assessee. Therefore, in view of the above, it is held that the commission payment of ₹ 9,88,29,729/- which is claimed to have been paid to non-resident agents cannot be allowed as business expenditure u/s 37 of the I.T. Act, and therefore, the disallowance of ₹ 9,88,29,729/- made by the Assessing Officer is accordingly confirmed. The ground of appeal is accordingly, dismissed. 20. The Learned. A.R. vehemently contended that the commissions to the non-residents are being paid from year to year. In this regard, he has drawn our attention towards page 413 of the paper book, which contains the details of the commission paid to various parties during the year as well as in the earlier years as follows:- Details of Commission paid to non-resident sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17720521 9882972 3 1 7 9 21. It was pointed out that during the year; commission has been paid only to two parties as is clear from the said chart i.e. Mitsui Co. Ltd., Japan and Omega Private Limited, Karachi. In the earlier year, commission was paid to Ahmed Jaffer Co. in Karachi. This party was reconstituted and became Private Limited Company at the same place and the same services are being rendered by Omega Private Ltd. None of the parties is related to the assessee. The assessee has entered into an agreement with both the parties for which attention was drawn to page 414 and 421 of the paper book. 21.1 The AO disallowed the said commission u/s 40(a)(i) for the first time in A.Y. 2005-06, on the pretext that no tax has been deducted at source on such commission paid. Though CIT (A) confirmed the disallowance, but the issue was decided in favor of the assessee by the Hon'ble I.T.A.T., Panaji in ITA No. 113/PNJ/2010 vide order dt. 10/03/2011. It is understood that department has not filed appeal against the said order in the High Court of Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rompt settlement of demurrage and dispatch matters. Our attention was drawn to Page No.131 of (Initial) PB Vol. l, wherein vide para nos. 2.3 2.4 services rendered by the commission agents are mentioned. The agents ensure that the goods would be supplied by the buyers on settled terms for which payment would be released by the buyer as settled between the two. The agents cannot be left out of the transactions. Sale of goods is not the only important aspect in international business, that too of iron ore business, various business auxiliary services like shipping dispatching, documentation, letter of credit are other important aspects to be taken care of for proper dispatch of goods and receipt of money. If the goods are not shipped in time, the assessee may have to bear extra cost in form of demurrage, compensation, etc. If the letter of credit is not opened in time it will delay the dispatch and the entire process. Either the assessee has to employ staff overseas which can take care of such things but it will increase fixed cost to the assessee, or the assessee can get services of these agents who have been rendering services to it for years and know the intricacies of business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were subjected to TPO's audit and no adverse inference was drawn by TPO in view of arm's length principle followed for making such payment. A photocopy of the addendum agreement entered with Mitsui Co. is placed at Page nos. 421-423 of (Initial) PB Vol. ll. Further, Mitsui Co. Ltd rendered services to the assessee during the year as can be seen from the photocopies of emails exchanged between buyer and Mitsui and seller and Mitsui placed at Page nos. 135-156 of (Initial) PB Vol. l. These evidences clearly show that the said agent has rendered services to the assessee and therefore commission paid to it should be allowed. A copy of agency contract entered into with M/s Omega Private Ltd is placed on record at Page nos. 414-420 of (Initial) PB Vol. ll. Though the agreement was entered into on 26/07/2007, but since no services were rendered by the said party as per contract, no commission was paid to it in the preceding year. However, in the year under consideration, services were rendered by it, and therefore the commission was paid. The said amount was paid to the agent for smooth execution of contract with Pakistan steel. The said party is not related to the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The agent confirming changes in the contract to be conveyed to the buyer 10 16 20.11.08 We are suggesting amendments to the draft LC 12 17 21.11.08 The agent confirming/suggesting amendments to the LC 13 18 17.11.08 The Agent confirms vessel nomination from the buyer 13-14 19 17.11.08 Our Acceptance to the above. 15 21 17.11.08 The agent forwarding draft LC 15-16 20 19.11.08 Our suggestion towards the amendments to the draft LC 17 22 24.02.09 The agent forwarding draft revised Final Adjustment sheet 18 23 24.01.09 We are suggesting corrections to Final adjustment sheets and requesting the agent to forward the same to the buyer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Laxminarayan Madanlal Vs. CIT 86 ITR 439 (Supreme Court). 24. We have carefully considered the rival submissions along with the order of the tax authorities below and also the material relied upon by both the parties. The only issue before us is whether the commission paid by the assessee has been incurred by the assessee wholly and exclusively for the purpose of the business of the assessee. Now, coming to the relevant provision in which the assessee claimed deduction is section 37(1) of the Income Tax Act, 1961. Section 37(1) reads as under:- Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession. Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personal expenses of the assessee company. It may be remuneration or perquisite in the hands of the management or the human beings but it cannot regard to be the personal expenses of an incorporated body. 25. The only dispute in this case relates to the fact whether the commission paid can be regarded to have been incurred wholly and exclusively for the purposes of the business or profession of the assessee company. Before 1939, the phrase used was 'Expenditure incurred solely for the purpose of earning profit'. The Omnibus provision of section 37 as amended by 1939 Act allows of 'Expenditure incurred wholly and exclusively in connection with such business/profession' as long as no personal/capital element is involved. The scope of the term 'For the purpose of business' is surely wider than the term 'for the purpose of earning profit'. In our opinion the Income Tax Department cannot prescribe what expenditure an assessee should incur and under what circumstances. Every businessman knows his interest best. The assessee may not be a prudent man and yet an expenditure incurred voluntarily for the purpose of the business would be allowable u/s 37(1). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Bombay High Court has also taken the similar view in the case of Ramanand Sagar Vs DCIT, 255 ITR 134 (Bom) in which it was held that the mere fact that the payment has been made under a contract is not conclusive of expenditure being laid down wholly and exclusively for the purpose of the business. Once doubt arise about the bonafide nature of the payment, it is necessary to look into the necessary circumstances such as relationship of the payee to the assessee, the general standard of similar expenditure in comparable business, the true worth of the services or goods in question and so forth. It is also open to the A.O. to question the reality of the expenditure i.e., the true nature of the payment, the true consideration for it and so forth. Once the A.O. considers the payment and the purpose to be bonafide, it is not open for him to substitute his own judgment what is the reasonable quantum of expenditure for the assessee. The A.O. can only decide whether the expenditure is real, whether it relates to the business and is wholly spent for that purpose. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third part also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. 27. If we apply the principles of the law as enunciated in the various judgments, we are of the opinion that once the A.O. finds that the assessee has bonafidely incurred the expenditure for the business, the A.O. cannot decide the quantum of the expenditure to be incurred by the assessee. In this case before us the assessing officer has disputed the fact that commission has been paid for the purpose of the business and also disallowed the said expenditure by applying the provisions of sec. 40(a)(i) as well as on the basis of the genuineness of the expenditure incurred. The CIT (A) while holding that the assessee was not liable to deduct tax in respect of the commission payment made to the non-resident agents took the view that the assessing officer was not justified in disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;, but without going into the-merits of the emails exchanged and without controverting how the same did not exhibit that actual services had not been rendered by those agents, he merely rejected the claim of the assessee as if the assessee has not incurred these expenses genuinely for the purpose of the business. It is cardinal principle of law that a disallowance cannot be made on mere surmises and conjectures. Where the explanation of the assessee is bonafide and evidences produced by it further corroborate its explanation, there is no reason for Revenue to disregard the same on whims without bringing forth any tangible and cogent material to the contrary. 27.2 The said two non-resident agents had been engaged by the asseseee in the past and they have been paid commission on sales abroad since last so many years. There is no law which mandates that a middleman is entitled to his commission only for the first time when he introduces both the parties to each other. We agree with the ld. AR that in fact, it is a normal business practice all over the world that after the parties are introduced the actual work of a commission agent starts. Here in the instant case of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been proved. Therefore, the disallowance of ₹ 9,88,29,729/- for commission paid to non-resident agents is deleted by allowing this ground of appeal of the assessee. 28. The ground nos. 3 4 relate to the common issue about the disallowance of the demurrage charges paid amounting to ₹ 36,05,767/- to the buyers as reimbursement and ₹ 1,19,70,782/- paid to the Shipping Companies/Ship owners u/s 40(a)(i) of the Income-tax Act. The brief facts of the case are that the assessee has noted that the assessee has paid an amount of ₹ 36,05,767/- to its buyer in Pakistan without deduction of tax at source and therefore he disallowed the same u/s 40(a)(i). In respect of sum of ₹ 119,70,782/-, the AO noted that the assessee deposited the taxes deducted on behalf of the shipping companies of the countries with whom India has no DTAA. The taxes were paid on its PAN on behalf of those shipping companies but were not paid within the due dates and therefore said amount was disallowed u/s 40(a)(i). When the matter went before the CIT(A), CIT(A) confirmed both the disallowances by merging both the grounds observing as under: 7.2 I have considered the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. The assessee has remitted the said sum to Pakistan buyers which they said buyer had paid to ship owners in addition to the Freight Charges due to delay in loading of the ships at the India Port. The said sum was paid as per the export contract. Tax is to be deducted at source only when income is chargeable to tax under this Act. So it is necessary to determine whether this income is taxable or not. Such payment is not in the nature of any income since this is merely offsetting the additional cost incurred by the said buyer due to the lack of operational efficiency and non-adherence to the stipulated timelines (terms of performance) by the seller. In fact this amount must be considered as an additional discount by the assessee to the buyer. It was akin to price reduction due to fault in product/service and is equivalent to discount/rebate which can be adjusted against the sale price. It goes to reduce the sale price rather than to be considered as an expense in the hands of the assessee. Further, even if for the sake of argument, it is assumed that there is an incidence of income in the hands of non-resident buyers, the same would not attract any tax in India in view of Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has export sales contract with the buyer on CIF basis. The assessee engages a ship on its own and paid the Freight directly to ship owners which are also non-residents. Sometimes there is delay in loading the ship within the pre agreed time line which results into payment of demurrage by the assessee to such ship owners. The CIT (A) did not deal with this amount separately but got it merged with payment made to Pakistani buyer without appreciating the defect of these payments were entirely different from demurrage reimbursed to Pakistani buyer. The said amount was paid to foreign shipping companies. U/s 172 demurrage is to receive the same treatment as Freight payment the assessee has not deducted any tax on these payments but in some cases the assessee assisted ship owners in discharging their legal obligation by making payment to the department for and on behalf of such ship owners and not as TDS. Assessing Authority misunderstood that the assessee has deducted the tax and deposited it. In the earlier year also similar payments were made without TDS and were allowed as deduction. Circular No. 723 of 1995 is very clear that section 194C and 195 are not applicable to section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be taxable in India and is not liable to tax deduction at source. On this basis, no disallowance can be made u/s 40(a)(ia) and accordingly we delete the disallowance of ₹ 36,05,767/-. 32.1 Now coming to the submission of the Ld. DR that these charges are the demurrage liable to tax in India u/s 172(8) of the I.T. Act and have been incurred by the assessee for making payment to the shipping company through foreign buyer. We have gone through the circular no.723 dated 19/9/1995 which deals with the provisions of section 172, 194C 195 of the Income-tax Act. It reads as under: Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, live-stock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship wise and journey wise, and requires the fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case where assessee has deducted TDS as the assessee was not liable to deduct any TDS in respect of payment made to the ship owner for the demurrage. There is no dispute that the income of the foreign shipping companies were chargeable to tax u/s 172 of the I.T. Act. The demurrage paid to these shipping companies were also to be treated as freight in view of specific provision of section 172(8). We have already held in the preceding paragraph that in view of circular number 723 dt. 19/09/1995, the provision of section 194C and 195 relating to tax deduction at source are not applicable to the income which is chargeable to tax u/s 172. In view of this circular the assessee was not obliged to deduct tax at source on the demurrage paid to the shipping owners during the year. Since the provision of TDS were not applicable, therefore no disallowance can be sustained u/s 40(a)(ia). We therefore, set aside the order of the CIT(A) on these issues and delete the disallowance of ₹ 36,05,767/- and ₹ 1,19,70,782/-. Thus the ground nos. 3 4 are allowed. 33.2. The ground no. 5 relates to the disallowance of education and higher education cess amounting to ₹ 19,72,00,814/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above discussion, I am of the considered opinion that the assessee's claim for deduction of Education Cess and Secondary Higher Secondary Education Cess is not maintainable and therefore the same has been rightly rejected by the Assessing Officer. Accordingly, I confirm the action of the Assessing Officer in rejecting the claim of the assessee. This ground of appeal is accordingly, dismissed. 34. The Learned. A.R. contended that the education cess and secondary and higher education cess are paid for providing finance for quality education and therefore it has been incurred for the purpose of the business. The payment of said cess is not specifically covered within the provisions of disallowance u/s 40(a)(ia) 40(a)(ii) or any other provisions of the Act. The Learned D.R. on the other hand contended that no deduction towards the payment of the education cess and higher secondary education cess was claimed in the original return. Even no revised return was filed making this claim. The education cess and secondary and higher secondary education cess forms an integral part of direct tax collection and therefore such payments are clearly covered under the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was expansion of these units by way of purchase of new plant and machinery in the years 2002-03 2005-06 respectively. In respect of ultra fines recovery plant at Codli, the assessing officer gave the reasons mainly that (a) the said unit does not fulfill the conditions of manufacture or production as required u/s 10B (b) no satisfactory evidence has been produced regarding the date of commencement of manufacture or production (c) The fresh approval of the board is not available to the unit and (d) the unit is not debiting any purchase cost in respect of the purchase of wastage from other units. In respect of three units in general, the assessing officer held (a) the iron ore processing cannot be treated as manufacture or production in view of the insertion of new section 2(29BA) defining the meaning of manufacture/production (b) the assessee had not maintained separate books of accounts for the EOU units and for non-EOU units and setting up of a unit in the old mines which are already being operated by the assessee cannot be treated as new unit. The assessee went in appeal before the CIT(A). The CIT(A) dealt with the deduction in respect of each of the units separately. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atified by the board of approval for EOU scheme. The approval was ratified by the Board on 14.1.11. Therefore, for the assessment year 2009-10, there was no approval of the board. CIT(A) ultimately took the view that the assessee was not engaged in manufacturing or production. The iron ore at Amona and Chitradurga plants of the assessee are not entirely from the iron ore extracted by the assessee from its mines. Part of the iron ores fed to the beneficiation unit at Amona is purchased by the company. Mines of the assessee from which iron ores are fed to the Amona and Chitradurga plants are very old which are being exploited by the company since long. The CIT(A) took the view that since the mines of the assessee are not new, it cannot be said that they formed part of the undertaking at Amona and Chitradurga, even if these two units are considered to be new. It was further held that the Amona and Chitradurga units cannot be said to have been engaged in extraction activities, therefore, the activities of Amona and Chitradurga plants cannot be held as manufacturing or production keeping in view the decision of the Supreme Court in the case of the assessee which has been followed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtraction and processing of iron ore together constitutes production. CIT (A) also held that the assessee company has not produced any satisfactory evidence with regard to date/year of commencement of business of the unit. Ultimately the disallowance of the claim of the assessee u/s 10B in respect of all the three units was sustained. 38. The Learned. A.R. contended that the assessee has 9 units, out of which it claimed exemption u/s 10B of the Act in respect of profit derived from 3 units. The profits from the 3 units i.e. the EOUs are in the same proportion as to the other units. Profits from EOU were 48% on sales of ₹ 931/- crores while profit from other units were ₹ 1,706/- crores on sale of ₹ 3,352/-crores. Thus the profits from the EOU were 48% while from the other units were 51%. For the sake of convenience and as argued by both the sides, we would like to deal with ground relating to exemption u/s 10B in respect of each of the three units owned by the assessee separately. 38.1 In respect of the Amona plant the assessee claimed exemption u/s 10B for a sum of ₹ 2,57,23,14,771/-, the learned AR contended that the plant at Amona was set up in 1985 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machines i.e., screening / Schenck (Australia) Banana Screening machine was introduced but the capacity of the plant was also enhanced from 1 MTPA (Million Tons Per Annum) to aprox. 2 MTPA with further flexibility to increase the same further. Our attention was drawn towards the production data from the year 1999-2000 to 2000-01 submitting that production has increased drastically which was 9.17 lacs MT in 1999-2000 and was 10.38 lacs MT in 2000-01. It was pointed out that during the year 2002-03 the production was 11.29 lac MT and this year was a transition year. Attention was also drawn to page-239 of the paper book, which gives the details of production data of few years after set-up. These are reproduced as under: FY MT (Lacs) 2002-03 11.29 2003-04 15.50 2004-05 15.14 2005-06 16.78 2006-07 17.62 2007-08 21.46 2008-09 29.87 2009-10 30.70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one. In respect of the averment of the Assessing Officer that the said unit is not engaged in any manufacture or production of article or thing. It was submitted that the Assessing Officer would not have understood the facts properly and therefore, a wrong interpretation of the decision of the Supreme Court in the case of Sesa Goa Ltd., 271 ITR 331 was taken. As per the Assessing Officer the ratio of the aforesaid case that both extraction and processing of crude ore are necessary to make a case of production whereas in High Court decision which was confirmed by the Supreme Court on appeal by the department no such reasoning was recorded anywhere. In fact the references were made to three High Court's decision in which it was held that the extraction itself was production. The famous case of Chowgule (Supreme Court) in sales tax matter was also distinguished in this case. In fact based upon Sesa Goa (Supreme Court) several cases have been delivered by the Supreme Court including 'Oracle' where one simple process of copying software onto a blank CD was also held to be production. Reliance was placed on the following other cases; a) Arihant Tile Marbles Ltd Vs Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court) c) CIT Vs Orient Paper Mills Ltd., 176 ITR 110 (Supreme Court) d) Mettur Chemical Ind. Corpn. Ltd Vs CIT 217 ITR 768 (Supreme Court) e) CIT Vs Mahaan Foods Ltd. (2008) 216 CTR (Del) 148 f) Gujarat Alkalies and Chemical ltd., Vs CIT 249 CTR (Guj.) 82 g) Taurus Merchandise (P) Ltd., Vs Income Tax Officer (2012) 143 TTJ (Del.). 38.6 It was submitted that as the first unit was set up during the year 1985 had become outdated, obsolete and uneconomical and it became dangerous to run the old unit. The assessee has to take up immediate action for setting up the new plant during 2002-03. Substantial capital of ₹ 6.5 crores was inducted while the old machinery worth ₹ 26.00 lakhs was used and no identity of the old unit was retained and the capacity of the plant was substantially increased from 1 MTPA to 2 MTPA and further in-built flexibility to expand thereafter which took place during the financial year 2008-09. If the new unit was not set up, the existing business of the assessee would have come to an end. All major machineries were installed afresh with capacities more than doubled and with scope to make further expansion. The earlier physi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of physical quantity and size. The usable steel from the dismantled plant was also re-used along with fresh steel purchases and fabrication charges were incurred on the same in setting up of the new unit. In respect of capital expenditure of ₹ 3.96 crores it was submitted that the Bills were filed as under; P M bills Amount PB Reference Submitted before the AO NIL Submitted before CIT(A) 2,21,69,787 Page nos. 1378-1435 of Addl. PB Vol.lll Submitted before the ITAT 1,35,23,639 Page nos. 794-1146 of Addl. PB Vol.ll Balance 39,16,594 (9.88%) Total capital expenditure 3,96,10,020 38.10 . During the course of hearing learned AR showed samples of the input called ROM (Run of Mines) which appeared to be pieces of rocks; and output in the form of iron fines and iron ore lumps, which were much less in size as compared to ROM. It was pointed out that practically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is found to be very small as compared to the total number of plant and machinery deployed in their processing plant. Therefore, the claim of assessee that the old and outdated existing unit was completely replaced by a new set of machines. Is factually incorrect. At page-47, as per CIT(A) vide para 10.6: By carrying out repairs a new unit is not set up. By repairing or renovating the rusted and corroded steel structures of the old plant or by changing the location/foundation of the old equipments or installing a few new machines in the entire plant comprising of several such equipments, the assessee cannot claim that it has set up a new unit. Appellant's explanation (common to both the of the above observations) The CIT(A) ignored to consider the explanation of the assessee that the basic cost of plant machinery in case of an iron ore beneficiation plant is incurred on raising steel and concrete structures on which the conveyor belts, crushers, screens and other such equipments are installed. The CIT(A) overlooked the basic composition of production apparatus required in an iron ore beneficiation plant and made the above naive assertion in a casual manner withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard the context completely. Neither he gave attention to certain critical documents nor to the fact that it was not a green field project (i.e. the assessee was not setting up a factory for the first time on a piece of land which was hitherto used for non-commercial or non-industrial purpose). 2.6 At page -79, as per the CIT(A) vide para-14: No material change in the input and the output of the unit, which essentially remains as iron ore. Appellants explanation This observation is patently wrong. The input is crude ore whereas the output is lumps and fines. Not only the physical appearance is absolutely different but even the commercial name and usage are both far different. There is practically no use of crude ore but the usage of lumps and fins is absolutely essential for steel making industry. It seems that the CIT(A) got misled by the loose usage of the term iron ore without verifying the actual facts. Moreover during the course of hearing before the Hon'ble ITAT, the assessee company showed samples of the input in the form of crude ore and the output in the form of iron ore and lumps. The activity was explained in detail which encompass transportation of crude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter travelled to the High Court. The Hon'ble Panaji Bench of the High Court of Bombay, while answering the question 'Whether on the facts and circumstances of the case, the ITAT was justified in holding that the assessee is entitled to deduction of investment allowance u/s 32A of the IT Act, 1961 in respect of machinery used in mining activity, ignoring the fact that the assessee is engaged in extraction and processing of iron ore not amounting to manufacture or production of any article or thing? , held as under (266 ITR 126): At the end of last but one para of the order.... The Act also contains internal evidence to show that the legislature has treated raw ore differently from processed ore. A Division Bench of this court in CIT Vs Emirates Commercial Bank Ltd., (2003) 262 ITR 55 = (2003-TII-01-SC-INTL) has given the benefit even in respect of data processing done on computers. In other words, the legislation being a beneficial piece of legislation, an expanded meaning should be so given and has to be given. Thus, the Hon'ble Bombay High Court ratified the position that raw ore was different from processed ore. Further, while agreeing with the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that extraction and processing of iron ore amounts to production within the meaning of the word in section 32A(2)(b)(iii) of the Act and consequently, the assessee is entitled to the benefit of sec. 32A(1) of the Act. It must be appreciated that the Apex Court categorically expressed that the reasoning given by the High Court on the meaning of word production as unimpeachable in its opinion, and since a common phase 'extraction and processing of iron ore' had been employed in the question. It was also answered in the singular manner only by the Apex Court. However, what must be understood is that the Hon'ble High Court in 266 ITR 126 nowhere held that both extraction and processing of ore shall have to be undertaken together to constitute production. Therefore, it cannot be understood that the Apex Court decided the issue in any different manner and it must be safely concluded that extraction of iron ore and processing of iron ore were independently held as production. Accordingly, the assertion of the department that extraction and processing should both be undertaken together in order to pass the test of production is just misgiving and against the spirit of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing exemption u/s 10B by holding the extraction and processing of iron ore as production is that the assessee should carry on both these activities by itself and it cannot be understood to mean that both these activities should be carried on by the EOU itself. In other words the Hon'ble ITAT did not hold that a EOU qualifying for deduction u/s 10B must undertake both these activities together, rather it was held that if the assessee extracted the ore by itself and also undertook processing of the ore as its EOU, it would qualify for deduction u/s 10B for its ore processing EOU. In the present case of the assessee also, there is no dispute that the assessee-company namely M/s Sesa Goa Ltd., also undertook both the activities of extraction and processing and has correctly claimed the deduction u/s 10B in respect of profits arising from processing of ore at its EOUs. Thus, the parameters laid down in the above case of Chowgule Co., by the Hon'ble ITAT are squarely met by the assessee. 2.8 At page 89. as per CIT(A) vide para-16: For determining the percentage of old equipments used in the new units even the assets held at the extracting unit must be taken into consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'production'. Reference was invited to page 174 to 179 of paper book Vol.l. The learned AR further submitted that the following guiding principle emerge for the reckoning of a new unit based upon various land mark rulings; - Where there is infusion of new capital - Where there is substantial modification in the old unit so as to disturb the identity of the old unit. - There should be lest possible or insignificant usage of the plant and machinery of the old unit, - There should be a negative act to disturb the identity of the old unit. - There is no bar on the existing assessee to set up new units essentially producing the same commodity as in the existing units. Thus, it was vehemently contended that the AO as well as the CIT(A) were not correct in taking the view that the assessee is not entitled for exemption u/s 10B in respect of Amona plant. It was also specifically pointed out by referring to the decision of the CIT(A) at page-48 that the CIT(A) has wrongly observed that the assessee has not made any addition in the plant and machinery. The assessee has invested the amount in the plant and machinery in Amona plant for this attention was drawn to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 9.18 39.2 The value of old plant machinery used in the new plant was at ₹ 6,93,596/- i.e., WDV was on 01-04-2005 and the value of plant machinery as on 31-03-2006 was at ₹ 1,00,78,229/-. The old machinery therefore, valued at a meagre 6.88% as on 31-03-2006, being the closing day of the previous year relevant to the AY: 2006-07 which has been declared as the first year of setting up the new unit by the assessee. During the FY 2008-09 the assessee submitted his application with the concerned authorities for conversion of newly set up unit an EOU. Approval in this regard was received vide approval no.1/64/2007:PER:EOU:KR:Commissioner, Ministry of Commerce Industry, Bangalore, which was ratified by the Board of Approval in its meeting held on 14-01-2011. The premises of the undertaking was bonded and License No.1/2008 dated 05-06-2008 was issue u/s 58 of the Customs Act and the commercial production for the converted EOU began on 06-06-2008 and the same was intimated to the Development Commissioner vide letter dated 14-07-2008. 39.3 The assessee submitted the copies of the documents to the AO and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @ year of transition 39.5 It was submitted that substantial capital was inducted and the production capacity went up from as low as 1.6 MTPA to 6.00 MTPA in a phased manner during FY: 205-06 itself. The production capacity went up to 2.5 MTPA the major reason for enhancement in FY 2005-06 was the installation of dust suppression system which contained dusting of iron ore in the entire plant, thus, paving the way for full utilisation of the production capacity (lumpy ore) and by 2008-09 the capacity increased to 6 MTPA. Since the process of setting up a new unit was started in 2005-06 and therefore, this year has taken to be the initial year. In which the benefit u/s 10B was the immediate one and this year was declared in the application filed before the authorities for the EOU. There was no intention to avail of maximum benefit. It was also stated that production before setting up of the plant during 2002-03 was different and production process is given at page 393 of the paper book. The details of the major machinery and equipment employed/used in the said unit in the old as well as in the new plant during 2002-03 are given at page-385 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his consolidates the declaration of FY: 2005-06 being the first year of the new unit made by the assessee and there is no dispute about it. At page-55 as per CIT(A): only few machines were replaced. The CIT(A) has opted to disregard that the main or most critical machine, i.e. screening machines were imported and also brought in new technology. The dust suppression system was bought and installed in FY 2005-06 which made it possible to tap the full capacity. Appellant's explanation Banana screen (M/s Schenck Process India Ltd, ) new Vibrating screens and Hydrocone Crusher, (M/s Sandvik SRP AB), which are the backbone of any iron ore processing plant were all new and having the latest technology. - Dust suppression system was installed in FY: 2005-06 itself (M/s Sathu Engg.) - Besides Pedestral Breaker System was also introduced in FY: 2008-09 (M/s Tollers Bentono) - New Conveyor Belts were also brought in - Only fees Hopper, Primary Jaw Crushers and some conveyors belts were used out of old plant with certain modifications. At page 58 as per CIT(A) vide para 11.3: The assessee claimed that the entire plant was demolished in the FY 2005-06 itself. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be for undertaking fabrication, erection and other works. Therefore, these expenses were not capital in nature and appeared to be in the nature of repairs to the existing steel structure. Appellant's explanation It must be appreciated that the beneficiation plant mainly consists of various types of conveyors and screens which are fitted on huge steel structures. Thus, admittedly, the usable steel by only salvaged from the dismantled plant was also re-used in setting up of the new and for which the fabrication charges etc., were paid of the said parties. Moreover, if the impugned bills did pertain to ordinary repairs, as averted by the CIT(A) then the same could have been easily booked in repairs accounts by the assessee and would have been fully allowed to it. Most importantly, the assessments for the AY: 2006-07 and 2007-08 had also been framed u/s 143(3) of the Act where the depreciation vis-a-vis capital expenditure (fixed assets) had been examined the respective AOs and even disallowances were made out of the same in some cases. (Reference is drawn the relevant pages of the said assessment orders given at page nos. 16 41 of Addl. PB-l). But in no case, addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is called sinter, otherwise it will effectively, smother the air flow in the blast furnace. In fact, it was only after the assessee installed a dust suppression system in FY 2005-06 that is managed to increase the production of fines in a substantial manner which was getting practically wasted to that, as a result the overall production of lumps and fines increased up to 38 to 49 lakh metric tons i.e., even beyond the installed capacity of 25 lakh metric tons expressed in terms of lumps. It is undisputed that the substantial expansion for this unit started in the FY 2005-06 in a phased manner spread over the years. There was some increase in production achieved due to partial expansion in the FY 2005-06 itself, but the real outcome of the said expansion in terms of production surfaced in the year in which it was completed i.e., in the FY 2008-09 (AY 2009-10) when production increased to 31.78 lakh MT. As far as the second averment of the CIT(A) is concerned that even when no investment had been made in plant machinery in the year 2007-08, production in that year increased to 21.26 MT from 10.71 MT in the preceding year, it must be appreciated that the plant was parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble ITAT, the assessee-company showed samples of the input in the form of crude ore and the output in the form of iron ore fines and lumps. The activity was explained in detail which encompass transportation of crude ore, crushing, screening and washing, stacking, loading in barges, river transportation to the port and export in ships. The assessee has also mentioned that it would be willing to show the nature of activity inviting the Hon'ble Members for a site visit in order to have on the spot understanding of factual matters. It was requested that though the claim was made u/s 10B in respect its three units Amona, Chitradurg and Gadia Sado (Codli) but considering the non-feasible to inspect all the three units, the nearest unit, Amona 100% EOU may be taken up for the site visit. The Hon'ble Members asked the Departmental Representative also to accompany the site visit. Accordingly, a site visit to Amona unit was arranged for the Hon'ble Members on 19-12-2012 in the afternoon. From the tax department the Standing Counsel. JCIT, ACIT and inspectors together with ITAT Bench Clerk accompanied the Hon'ble Members for site visit. The activity was explained on sight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision reached on 262 ITR 55 = (2003-TII-01-SC-INTL) (supra) in respect of the data processing that the same amounted to production, it has basically decided that the processing of iron ore also amounts to production following the same analogy. It can be so concluded since the data processing on computers does not involve extraction of an article or thing from earth, and, therefore, the reliance of the said judgment here can only be in respect of processing of the ore and not extraction of the ore. Further, in the last para of their order, the Hon'ble Bombay High Court held..... The ore has to be extracted or raised from the earth in which it is embedded ad has to be brought to the surface. What is brought to the surface is something new which comes into existence as an article or thing. If that be the case, winning or extracting of ore would fall within the expression 'production'. . Thus, on the question put before the Hon'ble High Court whether extraction and processing of iron ore amounted to manufacture or production, it decided that processing of ore was production and also that extraction of ore was also production'. However, the department prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pirit of the above decisions of the Hon'ble Bombay High Court and the Supreme Court. Furthermore, even in the case of Chowgule Co., Ltd., relied upon by the department, it must be appreciated the order dated 12/07/2007 of the Hon'ble Panaji Bench of ITAT in ITA No.162/PNJ/2006 was immediately rectified by the same Bench in Misc. Appn. moved by the assessee in MA.NO.23/PNJ/2007 order dated 19/7/2007 where it was finally held; We hold that the assessee-company itself is extracting the entire iron ores and thereafter processing the same, and therefore, entitled for the deduction u/s 10B as held by the Supreme Court in the case of Sesa Goa. The need for rectification arose since in the original order the Hon'ble ITAT had held that the asesssee was only processing iron ore but was not extracting the ore (Pl. See para-5 order dated 19/7/2007 in MA), but the Hon'ble ITAT found during the MA proceedings (in the light of sub-para 8 in para-4 of order dated 19/07/2007) that the assessee-company was extracting as well as processing the ore, and therefore, 10B deduction was allowed to the assessee company. It must be understood that EOU and assessee have different me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. The CIT(A) has asserted that to determine the percentage of the old machine reused in the new set up it is necessary to take into consideration all the old and existing machines of the respective units along with the plant and machinery deployed in the mines of the assessee. He has further averted that if the value of plant and machinery employed in the mines of the company are taken into consideration, then the percentage of old machine will certainly be exceeding the threshold limit of 20% as prescribed. The CIT(A) has justified his averments by relying on his interpretation of the judgment of the Hon'ble Supreme Court in CIT Vs Sesa Goa Ltd., (2004) 271 ITR 331 that the activities to be eligible to be held as 'Production' should comprise of the extraction as well as the processing of iron ore. Appellant's explanation The assessee has claimed deduction u/s 10B in respect of its beneficiation units only and not the mines. Therefore, there is no rationale in clubbing the machines employed at the mines with those owned by the units for the purpose of calculating the percentage of old equipments used in the new unit. Further, the CIT(A)'s asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o new facts were brought. Even the AO did not mention about the survey of the statement recorded during the survey. Our attention was drawn towards the statement to know about the process employed by the assessee. 40.1 On the objection of the AO that the said unit is not engaged in any manufacture or production or any article or thing. It was contended that the AO and the CIT(A) could not understand the process involved in the unit. This EOU employs the process and machinery which are different from other processing plant. What is fed as input in the plant is tailings, which is the waste material obtained from other normal processing and from this 'iron ore' is extracted as output. The input is merely is a waste and has cost practically all the characteristic of iron ore and cannot be considered as 'iron ore' extracted from the mines. From this waste material what is extracted is called the iron ore which has the utility and marketability. The waste, as such does not have any commercial marketability. It was contended that the decision of M/s Sesa Goa Ltd., (271 ITR 331) has wrongly been interpreted by the revenue. Reliance was placed for the preposition of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted with the SIA/DIPP and was duly shared with the AO. Some piece of tailing was physically produced at the time of hearing before the Hon'ble Bench. 40.6 The learned AR carried us to the order of the CIT(A) and the various observations made by him and contended and stated how these observations are not correct. On our permission, he submitted the synopsis in the following manner; Point-wise response to the observations of CIT(A) in his order; 2.1 At page -103 as per CIT (A) vide para 20: What is fed as raw material to the Codli unit is iron ore and what comes out after processing is also iron ore, the only minor difference being in the iron content of the material. Appellant's Explanation: CIT(A) has not understood is that the input for this plant is 'tailings', which is the waste material obtained from other normal processing and from this 'iron ore' is extracted as output. So, what goes in as input is 'tailings' and what comes out is the 'iron ore'. In fact, CIT(A) has made a contradictory statement to his above averment at page no. 107 of his order, where he has asserted that 'having lost all the characteristics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture or production of any article or thing? , held as under [266 ITR 126]: At the end of last but one para of the order: ... The Act also contains internal evidence to show that the Legislature has treated raw ore differently from processed ore. A division Bench of this court in CIT Vs. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 = (2003-TII-01-SC-INTL), has given the benefit even in respect of data processing done on computers. In other words, the legislation being a beneficial piece of legislation, an expanded meaning should be so given and has to be given. Thus, the Hon'ble Bombay High Court ratified the position that raw ore was different from processed ore. Further, while agreeing with the decision reached in 262 ITR 55 = (2003-TII-01-SC-INTL) (supra) in respect of data processing that the same amounted to 'production', it has basically decided that the 'processing' of iron ore also amounts to 'production' following the same analogy. It can be so concluded since the data processing on computers does not involve 'extraction' of any article or thing from earth, and, therefore, the reliance of the said judgment here can only be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of word 'production' was unimpeachable in its opinion; and since a common phrase - 'extraction and processing of iron ore' had been employed in the question, it was also answered in the singular manner only by the Apex Court. However, what must be understood is that the Hon'ble High Court in 266 ITR 126 nowhere held that both 'extraction and processing' of ore shall have to be undertaken together to constitute 'production'. Therefore, it cannot be understood that the Apex Court decided the issue in any different manner, and it must be safely concluded that 'extraction of iron ore' and 'processing of iron ore' were independently held as 'production'. Accordingly, the assertion of the department that 'extraction and processing' should both be undertaken together in order to pass the test of 'production' is just a misgiving and against the spirit of the above decisions of the Hon'ble Bombay High Court and the Supreme Court. Furthermore, even in the case of Chowgule Co. Ltd., relied upon by the department, it must be appreciated the order dated 12/07/07 of the Hon'ble Panaji Bench of ITAT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be understood to mean that both these activities should be carried on by the EOU itself. In other words the Hon'ble ITAT did not hold that a 'EOU' qualifying for deduction u/s 10B must undertake both these activities together, rather it was held that if the assessee extracted the ore by itself and also undertook processing of the ore at its EOU, it would qualify for deduction u/s 10B for its 'ore processing' EOU. In the present case of the appellant also, there is no dispute that the assessee-company, namely M/s Sesa Goa Ltd., also undertook both the activities of extraction and processing and has correctly claimed the deduction u/s 10B in respect of profits arising from 'processing' of ore at its EOUs. Thus, the parameters laid down in the above case of Chowgule Co. by the Hon'ble ITAT are squarely met by the appellant. 2.3 At Page 109-110 as per CIT(A) vide para 21.4: There is a limited discussion on Tata Tea case for alternate argument of appellant that in case of EOU, regard to be given to the EXIM policy. Appellant's Explanation; Reference is invited to the judgments in Tata Tea Ltd. Vs. ACIT (2011) 338 ITR 285 (Ker.) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases. No reference has been made by the CIT(A) to Bajaj Tempo (SC) and several such other rulings where it is held that once a claim is found basically bonafide, the procedural aspects be looked at liberally in the matter relating to incentive / exemption provisions of the Act. 3. Reply to pertinent averments raised in PR's Rejoinder (other than those already explained herein above) 3.1 Vide para 3b (page 7) of DR's PB Vol-II It is averred that the assessee did not include any amount towards cost of iron ore input to its Codli, Amona and Chitradurga units. If the said cost is taken into account, then there would be loss in all these units and deduction u/s 10B would be nil. Appellant's Explanation: This averment does not bear out from the facts. The assessee had declared 'cost of production' in the computation sheets of deduction claimed u/s 10B in respect of each EOU submitted during the assessment proceedings along with details of EOU-wise break-up of the 'cost of production'. A copy of the same was also furnished before the Hon'ble Bench on 20/12/12. It is also reproduced herein below: Amona Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of 5 years in terms of para 6.6(a) of Foreign Trade Policy. 40.7 Thus, it was contended that there is a change of utility waste in other plant for which there was no customer and it is being dumped was utilized by making the ultra-fine ore. The Learned. A.R. brought out the raw material i.e., the tailing which was in liquid form and also the ultra-fine ore which was in powder form and shown it before the bench during the course of hearing. Thus, he contended that both the things, raw material as well as the ultra-fine ores produced are different and having different utility. 41. The learned DR submitted the following facts in tabular form in respect of all the three units i.e., Amona plant, Chitradurga plant and Codli plant:- Codli Unit Amona Plant Chitradurga Unit Commencement of processing iron ore 1973 1958 1952 Place Panaji, Goa Panaji, Goa Chitradurga, Karnataka Acquired by assessee 1978 1985 F.Y. 1998-99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chitradurga 1952-53 to 1961-62 i. The provision clearly mandates that the assessee would be entitled to claim deduction u/s. 10B of the Act from the previous year in which the undertaking begins to manufacture or produce article or thing. Secondly, this claim is providing for a period of ten consecutive assessment years, again, from the date when the undertaking begins to produce or manufacture article or thing. Admittedly, in the facts of the present case the Codli, Amona and Chitradurga units of the assessee have not made a claim from the date of commencement of processing iron ore. Further all the three units have not met the consecutive assessment years contemplated in the Section from the date of commencement of processing iron ore. ii. The assessee in order to overcome this mandatory provision has projected a new contention that all the three units at Codli, Amona and Chitradurga are new units which have commenced processing of iron ore w.e.f. F.Y. 2004-05, 2002-03 2005-06 respectively. In order to substantiate their claim, assessee states that there is addition to the old machinery in these three units which would cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this subsection ONLY FOR THE UNEXPIRED PERIOD OF AFORESAID TEN CONSECUTIVE ASSESSMENT YEARS; [1st proviso to Section 10B(1)]. Previous year in which undertaking began to produce Unit name Ten consecutive assessment years Unexpired period after 2000 1972-1973 Codli 1973-74 to 1982-83 Not applicable 1957-1958 Amona 1958-59 to 1967-68 Not applicable 1951-1952 Chitradurga 1952-53 to 1961-62 Not applicable i. Admittedly, assessee had not applied for deduction u/s.10B of the Act before the Finance Act, 2000. In order to avail of the benefit after substitution of the Finance Act, 2000, assessee should have availed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by a hundred percent export oriented undertaking from the export of articles or things.[10B(1)] The deduction of such profits and gains are substantiated and has to be worked out in accordance with sub-section (4) of section 10B of the Act, which is as under: f. For the purpose of sub-section (1), the profits derived from export of articles or things ... shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things ... bears to the total turnover of the business carried on by the undertaking (sub section (4) of section 10B of the Act). i.e., Profits derived from export of article or things = Profits of the business of the undertaking X Export turnover in respect of such articles or things Total turnover of the business carried by the undertaking Admittedly, assessee has not included any amount towards cost of iron ore input to the Codli Unit, Amona Plant and Chitradurga Unit. The working of the claim made u/s.10B of the Act presented by the assessee would disclose this fact. Assessee has not included this amount only to booster the profit and clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the output again is iron ore. Both Assessing Officer as well as Appellate Commissioner examining the facts, find that all the three units are involved in processing of iron ore. The plant and machinery which is situated in the premises of these three units are benefication plants. It is mainly involved in screening of the iron ore which has been fed into the plants by a process involving either dry or wet. a. Assessee's contention Codli unit, Amona Unit and Chitradurga Unit are independent unit carrying on manufacture and production activities of article and thing. Therefore it satisfies the conditions contained in section 10B(2)(i)of the Act. b. Revenue's submission: Assessee has number of units which carry on independent activities. A series of activity from the extraction of iron ore to its ultimate export is carried on by these various units. The jurisdictional Bombay High Court, (2004) 266 ITR 126 CIT Vs. Sesa Goa Ltd., held the processes involved in mining ore commencing from extraction of iron ore to selling it for export are identified as under : (I) Extraction of ore from the mine; (II) Conveying the ore to the dressing plant; (III) Washi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the jurisdictional High Court in the case of the assessee itself. v. Firstly, examining the term manufacture , the jurisdictional High Court has concluded that not only the limited activity carried on by the Codli unit, but the entire activity carried on by the assessee i.e. the extraction of iron ore and the ultimate sale of the same would not amount to manufacture stands settled and concluded in the assessee's case. However as far as the Supreme Court level is concerned this issue has been kept open. In the facts of the case of Codli Unit it is only one small activity among the large number of processes involved by the assessee is carried on. When the large activity itself is held as not to be manufacture the question of the Codli, Amona Chitradurga units independently carrying on manufacturing activity would not arise. vi. Further, a bare reading of the judgments of the Apex court in 1981 AIR (SC) 1014 Chowgule Co., P. Ltd., Vs. Union of India ors., 1980 SCC (Tax) 319 Dy. Commissioner of Sales Tax (Law) Vs. M/s. Pio Food Packers and 1991 AIR (SC) 2222 Collector of Central Excise Vs. S.N. Sunderson (Minerals) Ltd., would also clearly show that the activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 1981 AIR (SC) 1014 Chowgule Co., P. Ltd., Vs. Union of India ors., 2. 1980 SCC (Tax) 319 Dy. Commissioner of Sales Tax (Law) Vs. M/s. Pio Food Packers. 3. 1991 AIR (SC) 2222 Collector of Central Excise Vs. S.N. Sunderson (Minerals) Ltd., 4. (2004) 266 ITR 126 CIT Vs. Sesa Goa Ltd., 5. CIT vs. Sesa Goa Ltd., (2004) 271 ITR 331 (SC) g. Covered issue:- Similar kind of activity of processing iron ore by washing, drying, powdering etc., is termed as process not as manufacture or production in two judgments viz., 1. Hon'ble ITAT, Panaji Bench in ITA No. 162 184/ PNJ/2006 in the case of Chowgule Co. Ltd., assessment year 2002-03. 2. (1996) 217 ITR 849 (Kar) V.M. Salagoacar Bros. (P) Ltd., VS CIT. 5. It is not formed by the splitting up or the reconstruction of a business already in existence. [Section 10B(2)(ii)] a. The Codli unit, Amona Unit Chitradurga Unit commenced their activity in the year 1973, 1958 1952 respectively. As held by the jurisdictional High Court in the case of the assessee itself, the assessee carries on number of activities, extraction of iron ore and the ultimate export of the same. The assessee after having taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. (1959) 35 ITR 662 (Bom) CIT Vs. Gaekwar Foam Rubber Co. Ltd., f. Admittedly, assessee was originally carrying on an integrated activity. Under the guise of claiming deduction u/s. 10B of the Act the assessee had identified one of its units and proceeded to make some value addition by way of machinery. The original business activity continues. The original ownership also continues. g. Hence, Section 10B(2)(ii) of the Act, is applicable and the assessee is not entitled to claim deduction. 6. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. [Section 10B(2)(iii)] a. Assessee's contention: The Codli Unit, Amona Unit Chitradurga Unit have no doubt been processing iron ore from the years 1973, 1958, 1952. The assessee to these three units has allegedly claimed that it has made certain value addition to the plant and machinery with effect from the Financial Years 2004-05, 2002-03 2005-06 respectively in respect of each unit. Therefore, each of these units should be called as new unit entitled for deduction u/s.10B of the Act. b. Revenue's submission: It is found by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. The main reason in all the three units for disallowing exemption u/s 10B in addition to the other reasons is that the assessee is not engaged in any 'manufacture' or 'production' of article or thing. Therefore, the first issue to be decided in this case is whether the assessee is engaged in any manufacturing or production of any article or thing in all the three units, namely, EOU units at Amona, Chitradurga and Codli. The processes undertaken at each of these units are as under: Processes undertaken at Amona Beneficiation Plant i. The crude iron ore (Run of Mines - ROM) extracted from the mines is received at the plant. ii. Crude iron ore is fed to the Hopper. iii. Screening of crude iron ore is done on a vibrating screen or the vibrating grizzly feeder having opening of the particular desired size. Thus, oversized products get separated. iv. The overflow from the vibrating grizzly, i.e., oversized product goes to Primary Jaw Crusher through conveyor belts. v. The oversized crude iron ore is crushed in the Primary Jaw Crusher to reduce the size of lumps. vi. Crushed crude ore lumps are conveyed to another vibrating screen, called Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e oversized crude iron ore is crushed in the Primary Jaw Crusher to reduce the size of lumps. vi. Crushed crude ore lumps are conveyed to another vibrating screen, called Banana Screen, which is a double deck screen (-The Vibrating Screen is a double deck system. The top deck of the same is calibrated at 30mm size and bottom deck is calibrated at 10mm size. The output is segregated into the material size of +30mm ( 30mm 10mm) and 10mm.). vii. The 30mm product from the Screens is moved to the secondary crusher, which is moved again to the secondary and tertiary screens for final screening of calibrated ore. viii. The secondary and tertiary screens both have a top deck of 30mm calibration and the bottom deck of 10mm calibration. The 10mm to 30mm calibrated product from the screen is segregated and stacked separately to be sold as lumps. ix. The 10mm product is collected as 'fines' in another product bunker from where it is sent for stacking or dispatch. The 10mm product from primary screen sometimes goes to another fines screen for further screening at 5mm, if required. x. Iron ore lumps and fines are then moved through conveyor belts to the Barges, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Codli Board of Approval (LOP No. for 100% EOU) PER:44(2007)IA-II/39/07-08 1/64/2007:PER: EOU:KR:CSZ/243 PER:303(1997) EOB/318/97 Board of Approval (LOP Date) 28/03/2008 15/02/2008 27/10/1997 Ratification by the Board of Approval (Letter No.) SEEPZ/IA-II/44/2007-08/6053 1/64/2007/EOU: CSEZ/225 IA-II/28/(57) /05-06/2406 Ratification by the Board of Approval (Letter Date) 06/07/2009 21/02/2011 03/04/2005 42.2 On accepting the application moved by the assessee requesting personal visit of Bench Members to its Amona Plant both members in presence of Mr. Seshachala (DR) Mr. Sanjeev Kumar Bindal (AR) and the officials of the IT Department and the assessee company made an on sight inspection of the said plant of M/s Sesa Goa Ltd., located at Amona Village, North Goa between 03.00 pm to 04.30pm On 19.12 12. The purpose of inspection was to understand the type of plant machinery installed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsels from both the sides continuously on different dates, i.e., from 21/11/12 to 20/12/2012. Both sides have exhaustively argued and put up their submissions and even requested to file the synopsis, which Bench permitted. Accordingly, synopses were filed from both the sides. After the concluding of the hearing while the case was under dictation, the revenue moved an application dated 18/01/2013 on 21/01/2013 for referring the issue whether the assessee is engaged in production or not in all the three units to Special Bench as in their opinion this issue is duly covered in their favour by the ITAT Panaji Bench in the case of Chowgule Co. for the AY 2002-03 in ITA No. 162/PNJ/2006 in case this Tribunal wanted to take a different view. The case immediately on 21/01/2013 was de-heard and was re-fixed for hearing the application of revenue dated 18/01/2013 for 19/02/2013 so that both the parties may be given sufficient opportunities. On that date Ld. CCIT personally appeared and argued in detail how the case was duly covered by the decision of this Bench in the case of Chowgule Co. (P) Ltd. for the AY 2002-03 in ITA No. 162/PNJ/2006 read with Misc. Application No. 23/PNJ/2007 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till the iron ore. No new product comes into existence. In this line of trade, different grades of iron ore will have different nomenclatures and names. But those expressions of convenience do not mean that the assessee has produced or manufactured a new article or thing. The decision of Hon'ble ITAT in MA No.23/PNJ/2007 has not changed the above position regarding production in the case of iron ore. 3. Why Special Bench : i. Observation of the bench during the course of hearing of the present case were that the decision in ITA No.162/PNJ/2006 and ITA No.1841/PNJ/2006 have been reversed and the same cannot be applied to the case of the assessee-company. ii) However, There is no reversal of the judgement. In fact, no ITAT can reverse or review its own decision. Only mistakes apparent from record can be rectified. iii) If this view is taken then it would be contrary to the earlier findings of ITAT in Chowgule's case. iv) The decision of Gujarat High Court in the case of Affection Investment Ltd., Vs. ACIT reported in 222 CTR 2009, Sayaji Iron Engg. Co. Vs. CIT (2002) 172 CTR (Guj). 339 (2002) 253 ITR 749 (Guj) and decision of Madras High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than that has been taken by the co-ordinate bench in their order dated 12.7.2007, this issue be referred to the Special Bench. He relied in this regard on the written submissions. Ld. AR on merit relied upon the earlier decisions referred to by him during the course of hearing. He reiterated and relied on the decision of Special Bench in the case of Madhu Jayanti International Ltd. and Others Vs. DCIT (SB)(Kol) (Supra) and that of Kerala High Court in the case of Tata Tea as well as decision of the Supreme Court earlier referred to. His main contention was earlier taken was that subsequent to the decision of Chowgule Co. Panaji Bench, a number of decisions have been decided by the Special Bench, High Court and Supreme Court, which are superior forum than the division bench of the Tribunal on the issue whether the processing of input amounts to manufacture or production. We will decide this issue subsequently as at this stage without discussing the relevant provisions of the Act, we cannot form an opinion whether the processing of iron ore to make it fit for export amounts to manufacture or production. 42.7 In our opinion, the common issue involved on the facts of the case in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed within the word manufacture for the purpose of sec. 10B. Explanation (iv) of the said sec. 10B further provided that the word 'produce' for the purpose of said section, in relation to any article or thing shall include production of computer programme. CBDT vide its circular no. 528 dated 16/12/1988 176 ITR ST. 154 explained the [provisions enacted by the Finance Act, 1988 under para 8.2 of the circular. In this circular, CBDT had clearly explained that the said new sec. 10B had been inserted in the statute book with a view to provide further incentive for earning foreign exchange so as to secure that the income of a 100% EOU shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under this new section was similar to the one provided under sec. 10A of the Act to industrial undertaking operating under the free-trade zone. It was also clarified therein that the expression 'manufacture' for the purpose of both sections 10A and 10B of the said Act would include any processing or assembling or recording of programme on disc, tape, perforated media or other information storag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (r) of section 2 of the Special Economic Zones Act, 2005. 43.3 Subsequently, Special Economic Zone Act, 2005 was passed by the Parliament in May, 2005, which was brought into effect w.e.f. 23/06/2005. Section 2(r) of Special Economic Zone Act defines the expression 'manufacture' as under:- Manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinct name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisci culture, poultry, sericulture, aviculture and mining . 43.4 This definition was adopted by the Legislature in section 10AA w.e.f. 10/02/2006 as adopted by the Special Economic Zones Act, 2005 by inserting Explanation 1(iii) to section 10AA of the Act which reads as under:- (iiii) 'Manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zone Act, 2005. As per the said definition 'process' is included in manufacture. Subsequently, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Om Prakash Gupta Vs Commissioner of Commercial Taxes [16 STC 935 (Cal)]. What is necessary in order to characterize an operation as processing is that the commodity must as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore processing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical composition demanded by the foreign purchaser and obviously as a result of this blending, the quantities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing had different name. As shown to us during the course of hearing we noted that the lumps and fines are entirely different from crude ore. During conversion of crude ore into lumps and fines, waste is generated which is called tailing and discharged into tailing pond. In Codli Unit these tailings which are in liquid form are converted into ultra fine. In our opinion as we noted from this physical sample also crude ore is entirely different from the lumps and fine in physical appearance used and chemical compositions even technically names are also different, similarly what comes as output from the input in codli unit that is also different in physical appearance and chemical composition. We do not agree with the learned D.R that there is not any change in physical and chemical composition of the output than the input as is being processed in all the three units. If we go to section 2(29BA) inserted w.e.f. 1.4.2009, we find clause (b) of this section clearly states that bringing into existence of new and distinct object or article or thing with a different chemical composition or integral structure tantamount to 'manufacture'. The Crude ore once processed is made ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43.8 In paragraph 7 of its in the case of Chowgule CO (P) Ltd. Vs. UOI (supra), Hon'ble Apex Court also considered the question whether the different brands of tea purchased and blended by the assesses for the purpose producing the tea mixture could be said to have been 'processed', after the purchase, within the meaning of the proviso to section 8(a), so as to preclude the assesses from being entitled to deduct their turnover under section 8(a), so as to preclude the value of the tea purchased by them. The relevant observations made by the Hon'ble Supreme Court in this respective are quoted and set out herein below for ready reference: 7. The Revenue however relied on the decision of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [10 STC 500 (Bom HC)]. The assessees in this case were registered dealers in tea under the Bombay Sales Tax Act, 1953 and they purchased in bulk diverse brands of tea and without the application of any mechanical or chemical process blended these brands of different qualities according to a certain formula evolved by them and sold the tea mixture in the market. The question arose before the Sales Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent conclusion and these observations were relied upon by the Assessee, since in the present case the blending was done by application of mechanical force, but we do not think that is the correct test to be applied for the purpose of determining whether there is 'processing'. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing' we are clearly of view that the blending of ore in the course of loading through the mechanical ore handling plant amounted to 'processing' of ore within the meaning of Section 8(3)(b) and Rule 13 and the mechanical ore handling plant fell within the description of machinery, plant, equipment used in the processing of ore for sale...... 43.9 In deciding the said question, the Hon'ble Supreme Court after considering the judgment of the Hon'ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [1959] 10 STC 500 (Bom), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of a qualitative change, in that the tea mixture which came into existence was of a quality and flavor from the different brands of tea which went into the mixture. 43.11 Hon'ble Kerala High Court had the occasion to consider whether assessee is engaged in the manufacture or production of an article or thing when assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285. The assessee's unit was recognized as 100% EOU. The assessee claimed exemption u/s 10B of the Act for the assessment year 1996-97 onwards which was granted up to the assessment year 2000-2001, but for the assessment years 2001-02 and 2002-03 the exemption was denied for the reason that by the Finance Act, 2000, the definition of 'manufacture' which included processing contained in sec. 10B of the Act was deleted w.e.f. 01/04/2001. (The same reasoning as has been given by the coordinate bench in the case of Chowgule co. ITA 162 184 heavily relied by the department un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act is to provide a liberal meaning to the word manufacture which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of manufacture contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of the counsel for the assessee is that the purpose of removal of the definition of manufacture from section 10B was not to provide a restricted meaning for that term contained in the main section because if that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been approved as a 100 per cent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 40 of the Industries (Development Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note the products for which the assessee's unit is recognized as a 100 per cent export oriented unit are tea bags, tea in packets and tea in bulk pack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Hon'ble Supreme Court in Tara Agency's case 292 ITR 444 will not apply even though Hon'ble Supreme Court in that case has held that blending of tea does not amount to manufacture or production of an article but is only processing. Thus, the Hon'ble Kerala high court in the case of Tata Tea Ltd. (supra) gave the clear cut finding impliedly that even if the assessee is engaged in processing and is recognized as 100% EOU, it will be entitled for exemption claimed u/s 10B of the Act. Whether on the facts and in the circumstances of the case, the Assessees, who are in the business of blending processing of tea and export thereof, can be said to be Manufacture/Producer of the tea for the purpose of Section 10A/10B of the I.T. Act, 1961? 44. The brief facts in the case of Madhu Jayanti International Ltd. in ITA No.1463/Kol/2007 were that the assessee was engaged in the business of manufacturing, processing, exporting and dealing in various commodities, more particularly tea, coffee, jute, pepper, chillies, cardamom, turmeric and similar other spices, etc. The assessee, as per the claim is a 100% EOU within the meaning of section 10B of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Economic Zones Act, 2005, which definition is as under: Manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandly, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining . In Exim Policy, the expression manufacture is defined, in paragraph 9.30 9.31 thereof almost in the same manner as in the Special Economic Zone Act, 2005, which is as under. Manufacture means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. But the only difference between the Exim Policy of 2002-07 and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aging and export of tea bags, tea packets and bulk tea packs in its modem factory, well equipped with all imported and sophisticated automatic plant and machineries with the help of over 100 workmen engaged on contract basis through M/s. Trot Pvt. Ltd. The manufacturing', operations are earned in its said factory situated at 19/4A, Munshiganj Road (under Falta Export Processing Zone), Kolkata. We Find from facts of the case that the details of turnover of the assessee shows Bulk Tea (0.94%), Packet Tea and Tea Bags .(99.06%),. as. per different descriptions, brand names and varieties, as listed APR. Assessee Company is duly registered as a 100% EOU by the Government of India, Ministry of Industry, Department of industrial Policy and Promotion Secretarial for Industrial Approvals, ECU Section in the state of West Bengal for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt in terms of Registration Certificate dated 26th December, 1995, inter alia, with the condition that its 100% production (excluding rejects not exceeding 5%) would have to be exported and that its registered EOU Unit shall make value addition to a minimum extent of 79%. Undisputedly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar in nature and the wordings of the statutory provisions are similar in nature is correct. We find that Hon'ble Kerala High Court also considered the judgment in-the decision of Supreme Court in Tara Agencies, supra relied on by the Ld. CIT, DR, wherein Hon'ble Supreme Court clearly held that blending of tea does not amount to 'manufacture' or 'production' of an article, but is only processing. We find that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act. 36. We, in view of the above, hold that when the products for which tie assessee's unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down herein, so far as the claim for relief u/s. 10A or 10B of the Act in accordance with law. 44.1 From the reading of para 35 of the aforesaid judgment we noted that the Special Bench in this case clearly held that the assessee was engaged only in processing and was not engaged in the manufacture or production but had ultimately under para 36 it took the view in view of the fact that the definition of 'manufacture' u/s 2(r) of the SEZ Act, 2005 which is incorporated in section 10AA w.e.f. 10/02/2006 includes 'processing'. Therefore, following the decision of Kerala High Court in the case of Girnar Industries and Tata Tea Ltd. (which was discussed by us in the preceding paragraphs) held that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea. 45. We have also gone through the decision of Hon'ble Supreme Court in Indian Cine Agencies Vs CIT 308 ITR 98. In this case the question before the Hon'ble Supreme Court was: When the assessee was engaged in the activity of cutting jumbo roll films into flat and small rolls in desired sizes, whether such activity undertaken by the assessee was manufacture or production? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961. 45.2 In this case also, Hon'ble Supreme Court took the view that cutting and polishing of the marble blocks is the activity which constitutes 'manufacture or production& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal rectified the order as the Tribunal noted the assessee itself was extracting the entire ores and processing the same. Thus, the assessee complied with both the conditions of extracting and processing of iron ore. This Tribunal did not reverse the finding that the processing is not entitled for the exemption. The Tribunal did not reverse the finding that extraction and processing should go together. Even that bench / tribunal did not visualize that 100% EOU is approved for a particular location and its boundry cannot extend beyond that location. It is only the profit derived by the 100% EOU Unit situated within that location, can be regarded to be the profit derived by the 100% EOU. The assessee in that case has taken the mines on lease which were not approved as part of 100% EOU but still the assessee was allowed exemption u/s 10B even though the iron ore extracted from those mines which were taken on lease were not part of the 100% EOU 45.4 No doubt the decision of the coordinate Bench is binding on us in view of the settled judicial principles in the various decisions even relied on by the Ld. CCIT but there are certain exceptions to this cardinal principle of judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion certain material facts which the first Tribunal failed to take into consideration . 45.5 The other exception is for non-binding of the coordinate Bench decision is when there had been amendment in law subsequent to the decision on the basis of which the coordinate bench rendered the decision and the co-ordinate Bench could not be able to consider the said amendments, the decision of the co-ordinate Bench is not binding. From para 14 of the order of the Co-ordinate Bench it is apparently clear while deciding the appeal in the case of Chowgule Co. (ITA 162 184), it had got impressed that the expression processing is omitted in Section 10B. The appeal relates to A.Y.2002-03 not relating to impugned A.Y. Clause (iii) of Explanation 1 to section 10AA, which lays down that the expression manufacture shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, and section 2(29BA) were subsequently brought into the statute after the rendering of the decision of Hon'ble Supreme Court in the case of Sesa Goa 271 ITR 331 on the basis of Co-ordinate bench decided the case of Chowgule Co. Even these provisions were not in the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese decisions are given as under:- i) India Cine Agencies 308 ITR 98 (SC) ii) Oracle Software India Ltd. 320 ITR 546 (SC) iii) Arihant Tiles and Marbles (P) Ltd. 320 ITR 79 (SC). 45.6 We noted that in all these decisions except in the case of Oracle Software the decision of the Supreme Court in the case of CIT vs. Sesa Goa Ltd. 271 ITR 331 was referred to by the court. Hon'ble Punjab Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. 286 ITR 1 (P H) has observed as under on the responsibility of the Tribunal while deciding the case: The Tribunal being the last fact-finding authority, a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue. Every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that this issue is duly covered by the decision of the Special Bench in the case of Madhu Jayanti International Ltd.(supra). The relevant paragraph of this judgement has been reproduced by us in the preceding paras. 45.9 In this decision, Special Bench has exhaustively dealt with the provisions of section 10B, section 2(29BA) of the Income-tax Act, 1961 and section 2(r) of the Special Economic, Zones Act, 2005; and the various decisions of the Supreme Court as well as the High Court which dealt with the similar issue and even the decision of Chowgule CO (SC) as was referred to by us in the preceding paras herein above. The Special Bench clearly noted in this decision, the decision of the Supreme Court in Tara Agencies' case 292 ITR 444 in which it was held blending and packing of tea amounts to processing and is not manufacturing or producing of an article or thing. In this decision the Special Bench also noted that Kerala High Court in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 (Ker.) which took the view that 100% EOU engaged in processing cannot be denied exemption on the basis that the units are not engaged in manufacture or production. Moreover, on facts exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total: 3,96,10,020 8,33,34,046 (All Phs) 9,00,78,574 The contention of the assessee is that it had set up all these units as new units and had also got the approval for them from the competent authority as 100% EOU units. The old machinery and part of old machineries wherever used, the value of these machineries were less than 20% in each units. The old units situated in Amona, Chitradurga and Codli were eroded, nonproductive and non-economical. The revenue has strongly contended that none of these units even though 100% EOU but were setup long ago. The assessee had merely renovated these units during the period as claimed by the assessee. The revenue on the other hand accepted that the assessee had invested in Amona plant ₹ 3,96,10,020/- during the year 2002-03 and in Chitradurga unit during F.Y. 2005-06 to 2008-09 ₹ 8,33,34,046/- but the assessee had not submitted any evidence in respect of the investments made in the Codli unit and in which year. We noted that CIT(A) in his appellate order at page nos. 48-50 has given 'Depreciation Charts' in respect of Plant Machinery pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th these amounts but this in our opinion will not change the true character of the transaction. We find force in the submission of the assessee that in the case of Amona EOU, old unit set-up in 1985 had become outdated, obsolete, even dangerous and uneconomical to run after a span of 17 years. Therefore, the assessee had to take an immediate action to either abandon it or revamp it entirely. This fact is also proved with the fact that the production capacity of this plant which was 1 MTPA earlier got doubled at 2 MTPA coupled with further flexibility created to increase it more in future after setting up new unit. The newly increased production capacity had not been denied by the revenue. The cost of new plant and machinery for all major / critical processes and civil structures for those plants amounted to ₹ 3,96,10,020/- during the FY 2002-03, whereas the WDV of the old plant used in the new undertaking was just ₹ 26,17,714/-, which is a mere 6.7% of the cost of new plant machinery, i.e., within the permissible limit of 20%. The CIT(A), in our opinion, was not correct in comparing the number of machines and equipments installed in mining division to be part of old p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the value of plant machinery existing as on 01/04/2005 was merely 7.4% of the cost of new plant machinery; which is also within the permissible limit. The accounts books in that year were duly audited and were not rejected by the Assessing officer in those assessment years. Now coming to Codli UFR unit, we noted that neither the assessing officer nor the CIT (Appeals) has disputed the capital investment made in new plant machinery in the FY 1999-2000, they have merely expressed their dissatisfaction on the evidences furnished by the assessee in respect of the date of commencement of manufacturing or production, which was stated as 08/03/2000 by the assessee on the strength of documentary evidences such as the Approval from the Board of Approvals, intimation of commencement of commercial production on 08/03/2000 to the Ministry of Industries, etc., which have discussed separately in this order by us. The main contentions of the revenue before us are as under:- (i) That all old machines were not replaced since there was no deletion in the book value of the existing plant shown in the depreciation charts for the concerned years. (ii) That by carrying out repairs a new un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on 31/03/2003 and 31/03/2006 and also the break-up of Service and Other Proceeds provided at page nos. 1356 and 1365 of the paper book for the said two financial years respectively. Gross receipt from sale of scrap for Goa (Amona unit) amounting to ₹ 71,41,971/- was declared in the FY 2002-03; and that of ₹ 4,67,163/- was declared for the year ended on 31/03/2006 in respect of Karnataka (Chitradurga unit). We find substance in the explanation of the Ld. AR that the said contention of the Revenue does not, therefore, hold good in our opinion. Otherwise also, we have noted that the value of the existing plant was much below the threshold limit of 20% required for substantial investment for setting-up of a new unit for the purpose of section 10B. 45.13 With regard to the contention of the Revenue that in the case of Chitradurga unit, some bills were found for undertaking fabrication, erection and other such works which appear to be revenue in nature and not capital in nature. We noted the explanation of the Ld. AR that the assessments for the AYs 2006-07 and 2007-08 had been framed u/s 143(3) where depreciation vis-a-vis capital expenditure (fixed assets) had duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division and EOU units are entirely different, and the dispute before us relate only to the EOU units whether they are new or not, therefore in our view, revenue is not correct in adding the value of the extraction division for determining 20% threshold limit of old plant and machinery for establishing the new unit. On the one side, the revenue is taking the contention that extraction division is not the part of 100% EOU, therefore the assessee's EOU units cannot be regarded to have been engaged in extraction of ore and iron ore processing, on the other hand, while determining the threshold limit of 20% of old plant and machinery, the revenue cannot be permitted to take a contrary contention. We are of the firm view that while determining the eligibility of a particular unit u/s 10B, its only the value of old plant and machinery installed in that very unit will be considered for determining the threshold limit of 20%. Thus, this contention of the revenue stand dismissed. Production date submitted by the assessee on record clearly prove that the production in each of these units got substantially increased as compared to the production in the old units dismantled or discarded. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the statute itself has envisaged and approved of a situation in which an old existing smaller industrial undertaking is absorbed by a new much bigger industrial undertaking. 15. In the present case, only capacity was increased and there was expansion of old business with some modifications. As for reconstruction of the business, it is nowhere evident that the old industrial unit was split up or damaged or destroyed that was supposedly reconstructed as a new unit by the assessee. What the assessee has done is to set up an industrial undertaking with latest technology and with increased capacity and of course, with a fairly good amount of fresh investment (ii) Mettur Chemicals Industrial Corporation Ltd. Vs. CIT (1996) 217 ITR 768 (SC) 11. It is found as a fact that the appellant had begun to manufacture or produce articles in the previous year ended on 31-3-1957 with the help of thirty hooker cells. It is true that rectifier had not been installed in the year 1957-58 but it is not in dispute that with suitable adjustment being made to the power system, the thirty hooker cells which had been installed were utilised. The use of these new hooker cells had resulted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be formed by the reconstruction or splitting up of a business already in existence. Then, the authorities below have observed that mere registration as a one hundred per cent EOU is not the sole criterion for grant of deduction under s. 10B of the Act. This observation itself amounts to an admission of the unit being registered as a one hundred per cent unit with the Development Commr., NEPZ. Explanation 2(iv) to s. 10B of the Act provides for a one hundred per cent EOU to mean an undertaking which has been approved as a one hundred per cent EOU by the board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 and the Rules made thereunder. For facility, the said Expln. 2(iv) to s. 10B is being reproduced as follows:- Hundred per cent export-oriented undertaking means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the Rules made under that Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial undertaking expands his existing business which he certainly does, would not on that score deprive him of the benefit under Section 80-I. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is a new identifiable endeavour where substantial investment of fresh capital is made to enable earning of profit attributable to that new capital. In the circumstances, the question referred for the opinion of this Court is answered in the negative, i.e., against the Revenue and in favour of the assessee... (v) Bajaj Tempo Ltd. Vs. CIT (1992) 104 CTR (SC) 116 Deduction under s. 15C of 1922 Act (s. 80J of 1961 Act) - Allowability - Industrial undertaking established in a building taken on lease used previously for other purpose - Tools and implements worth ₹ 3,500 of the previous undertaking also transferred - Relief under s. 15C is allowable - Clause (i) of sub-s. (2) of s. 15C does not apply - The provision granting relief was enacted to encourage industrialization and has to be construed liberally - Tools and impleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961. We therefore, dismiss this claim of the revenue. 45.19 We noted that in respect of the Amona plant the assessee has duly informed the DC, SEZ Bombay vide his letter dated 9.3.2008 i.e., commercial production started on 8.3.2000 and copy of the said letter was duly sent to Customs Department which was not disputed by these competent authorities. 45.20 In the case of Chitradurga plant also we noted that the assessee vide its letter dated 14.7.2008 duly intimated to the DC, SEZ that the converted 100% EOU is started commercial production on 6.6.2008. The premises of the said unit was bonded and the licence no. 1/2008 dated 5.6.2008 was issued u/s 58 of the Customs Act. Similarly, we noted that in the case of Codli Unit the assessee has duly intimated to the Ministry of Industry vide letter dated 9.3.2000 that the commercial production is started on 8.3.2000. None of the aforesaid Government authority has disputed that the assessee has not started commercial production on that date. 45.21 In view of the aforesaid discussion, we are of the view that the assessee is entitled for exemption u/s 10B in respect of all the three 100% Export Oriented Units, but during the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission of the assessee but in the interest of justice and fair play to both the parties, in respect of this unit also we direct the assessing officer to recompute the profit of this unit eligible for exemption after satisfying himself about the fair market value of 'tailings' after giving proper and sufficient opportunity to the assessee to prove the market value of the tailings used in the Codli unit and allow the assessee exemption to the assessee u/s 10B of the Income-tax Act, 1961 for Codli unit on the profit so recomputed accordingly. The assessee is directed to adduce the necessary evidence on which it may rely to prove the market value of inputs before the assessing officer. Thus, the ground nos. 7, 8 9 are partly allowed. 46. Grounds nos.10 11 in assessee's appeal relate to disallowance of depreciation claimed u/s 32(1)(iia). The brief facts of the case are that the assessee claimed additional depreciation amounting to ₹ 10,91,79,435/- and ₹ 10,01,21,951/- in respect of iron ore division and ₹ 90,57,484/- for Metallurgical Coke Division. The AO took the view that the assessee was not engaged in the manufacture or production of any art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used the iron ore extracted from its mines and also from other mines taken on lease for processing to make it marketable for export. Sec.32(1)(iia) only requires that the assessee must be engaged in the business of manufacture or production of any article or thing. Thus, the assessee must be allowed investment allowance so far as it relates to plant and machinery used in iron ore division. In respect of claim of the assessee for the additional depreciation for the plant and machinery installed in metallurgical coke division, the assessee contended that sec.32(1)(iia) nowhere requires that the new plant and machinery must be acquired or installed for manufacture or production. The only condition subject to the proviso therein is that the assessee must be engaged in the business of manufacture or production or article or thing. The learned AR also tried to explain the process of coke division to prove that the coke division is engaged in the production of an article or thing. The learned DR on the other hand relied on the order of the CIT(A). 46.1 We have carefully considered the rival contentions alongwith the order of the tax authorities. Sec.32(1)(iia) laid down as under; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Hon'ble Supreme Court in assessee's own case reported in 271 ITR 331 (SC) (supra). This section used the word 'business of manufacture or production' not the word 'manufacture and production'. We do not agree with the revenue that the case of the assessee is not covered by the decision of the Hon'ble Supreme Court in assessee's own case. Respectfully following the decision of the Hon'ble Supreme Court in assessee's own case, we delete the disallowance and allow the additional depreciation to the assessee amounting to ₹ 10,91,75,435/-. Revenue's appeal:- 47. The first ground is revenue's appeal is general in nature and does not require any adjudication. 48. The second ground relates to deletion of the disallowance of expenditure on research Development. The brief facts relating to the ground is that the AO disallowed a sum of ₹ 1,94,55,376/- considering the same as scientific research expenditure by treating it as expenditure of capital in nature. The AO has dealt with this issue under para-2 page-5 of the order. When the matter went before the CIT(A), the CIT(A) after getting remand report on the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forward contracts, according to the assessee, to hedge loss on receipt of the export proceeds. The AO applied provisions of sec. 43(5) and treated it to be the speculative loss. When the matter went before the CIT(A), the CIT(A) on the basis of the decision of the jurisdictional High Court in the case of CIT Vs Badrida Gauridu(P) Ltd., (261 ITR 256) took the view that the loss incurred by the assessee on forward contracts had a direct nexus with it export activities and therefore, such loss is a loss incidental to the business activities of the assessee. This loss cannot be regarded to be the speculation loss. The learned DR even though, before relied on the order of the AO could not bring to our knowledge any other decision of the jurisdictional High Court or that of the Supreme Court which would have taken a contrary view, what has been taken by the Hon'ble Mumbai High Court into 261 ITR 256. Even this was not the case of the revenue that the said decision was not applicable in this case. Under these facts of the case, we are of the view, that no illegality and infirmity is caused in the order of the CIT(A) while deleting the disallowance on account of foreign exchange on for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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