9911796707
TMI Blog2013 (9) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance by the A.O. of the' expenditure of Rs. 9,88,29,729/- towards payment of sales commission to the nonresident agents. 3. The Learned CIT (A) erred in confirming the disallowance made by the A.O., u/s. 40(a)(i) of the Act, of the expenditure of Rs. 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 Rs. 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 Rs. 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 Rs. 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es scientific research as any activities for the extension of knowledge in the fields 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 Rs. 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of investment, income from which 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 + Rs. 30,19,67,88,502 = Rs. 50,20,12,82,136/- Average of the above = Rs. 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. = Rs. 25,10,06,41,068x.005 = Rs. 12,55,03,205 Less: Administrative expenditure already disallowed by the assessee Rs. 25,78,156 Rs.12,29,25.049 Accordingly, a sum of Rs. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Rs. 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 Rs. 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 considered expenses only un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 Rs. 21.85 crores is allocated on a pro rata basis, the proportionate amount relatable to dividend income will be Rs. 62.10 lacs instead of Rs. 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 Rs. 4853 crores. The average value of the investments as per the balance sheet is found to be Rs. 2510 crores. Put together, the total turnover including investment in mutual funds comes to Rs. 7363 crores approximately. Therefore, if the total administrative expenditure of Rs. 56.59 crores is allocated on a proportionate basis, the expenditure incurred in relation to the dividend income shall amount to Rs. 19.29 crores. As against this, the assessee had computed an amount of Rs. 25.78 lacs as the proportionate expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05 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 as far as the computation of the expenditure under Rule 8D is concerned. Therefore, in my c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58 14870566 1703935 2696889 Allocation of Expenditure on exempt income (on Dividends) DIVIDENDS SGL - Dividends 1,42,72,51,668 25,78,156 SIL - Dividends 6,57,29,601 1,18,733 Total Dividends 1,49,29,81,269 26,96,889 Designation of Employee Treasury Officer Chief Financial Officer Managing Director Total Salary CTC Basis 4,02,475 25,48,920 1,32,84,603 1,62,35,998 Percentage of salary 100% 25% 5% Amount 4,02,475 6,37,230 6,64,230 17,03,935 8. The assessing officer mainly observed that he is not satisfied with the disallowance made with the assessee and applied rule 8D. The assessee company did not borrow any funds for making such investments and the same was made out of its own funds. No direct administrative expenses were incurred in respect of such investments. Even assuming that the expenditure incurred as referred to in section 14A covers also indirect expenditure, a proportion of administrative expenditure of Rs. 25,78,156/- (which could be relatable to such investments) had already been offered for disallowance u/s 14A. The said disallowance offered by the assessee included part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments in mutual funds (Rs. 2,510 crores), then it shall amount to Rs. 19.29 crores in respect of dividends. f) As per section 80HHC Explanation baa, 10% of receipts could reasonably be held as the expenditure in relation to other receipts. Then the expenditure comes to Rs. 25.10 crores being 10% of the investment of Rs. 2,510 crores which is very close to the estimation of the AO. g) On the basis of above deviations and discrepancies, it is clearly established that the method adopted by the assessee is erroneous and flawed and the AO is fully justified in invoking Rule 8D and therefore confirmed the disallowance. 9. It was submitted by the Ld. Counsel that the assessee invested funds on the advice of mutual fund managers. Mutual fund officials came to the doorstep of the assessee to collect the forms and cheques and rendered all services and in some cases dividends are reinvested in the mutual funds itself and thus practically no cost was incurred by the assessee in making investments and receiving dividends. The assessee invested in debt mutual funds. Page Nos. 457-458 of (Initial) PB Vol.ll containing details of investments exhibit that the assessee invested in a limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to earning exempt income. No expenses such as rent, legal and professional fees, travelling expenses of director, etc., were particularly incurred for this investment activity and therefore no disallowance was made. Hon'ble Supreme Court in CIT Vs Walfort Share & Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC) held that the AO is required to prove that the disallowance is necessary due to proximate cause and nexus of expenditure to earn the exempt income. Likewise, in Maxopp Investment Ltd Vs. CIT (2011) 15 Taxmann. Com 390 (Delhi), it has been held that the Assessing Officer is required to satisfy as regards the incorrectness of the claim of expenditure.lt was for the AO to point out the expenses actually incurred for earning the exempt income and point out discrepancy in the computation of disallowance made by the assessee. But no such effort has been made by the AO and no such discrepancy has been pointed out as can be seen from the assessment order. No evidence has been brought on record by the AO that the explanations of the appellant were not correct. A reasonable amount of expenditure of more than Rs. 25.78 lacs including salaries was disallowed by the appellant himself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds can at best be the stock of iron-ore/finished goods, but it can never be said to correspond to the turnover of iron-ore, etc. in any manner because the basic nature of receipts and income is such that they can never correspond to stock or value of investment at all. Further, the turnover of mutual funds, i.e., the value of redemption of mutual funds is subject to tax as capital gains [since exemption/s 10(38) is not available on liquidation of a debt-oriented mutual fund] and therefore the said basis cannot be considered for the purpose of computation of disallowance u/s 14A. Thus, to allocate the indirect expenses, only dividend receipts / income could have been considered as has been done by the assessee. Thus, the presumption of the CIT (A) to consider the value of investment for allocation of expenses is baseless. Another preposterous proposition of the CIT (A) is to apply section 80HHC which is entirely a different code for an entirely different purpose. The basis of 10% adopted therein cannot be considered while computing disallowance u/s 14A. If that basis was to be adopted then there was no need to introduce Rule 8D. The intention behind enacting the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of disallowance of expenditure when the available factors and circumstances do suggest that an ad-hoc application would provide such result as has happened in assessee's case. It was pointed out that, as a result of computation of disallowance by the assessing officer u/s 14A, the disallowance in relation to exempt income comes at Rs. 12,55,03,205/- i.e. about 8.8% of total exempt dividend income. Whereas, as per the audited accounts, the total administrative expenses incurred for the whole year are only Rs. 56.59 crores with regard to the total turnover of Rs. 4,996.23 crores, including the exempt dividend income. This works out only at 1.7%. It is impossible for a company to incur almost 1/5th of Rs. 56 crores in earning an income which is from investment and not from the main stream. 13. The Learned D.R. on the other hand submitted that the assessee's investment in shares, etc. are Rs. 2,510 crores. Dividend income earned from this investment is Rs. 142,72,73,668/-. The assessee has worked out the disallowance at Rs. 25,78,156/- u/s 14A on ad-hoc basis by taking into account expenditure incurred towards maintenance of office equipment, printing & stationery and postag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoke Section 14A of the Act. Satisfaction of the Assessing Officer must in the first instance make the determination, it does not prohibit the Appellate Commissioner to revise the determination or exercise the power which the ITO could exercise. Admittedly, assessee works out the administrative expense which is found to be incorrect. Admittedly, assessee cannot workout the expense as per Section 14A of the Act on ad-hoc basis and said Section 14A of the Act is not applicable or no administrative expense incurred. Contention that no expenditure incurred for earning substantial dividend income cannot be accepted. No dispute regarding computation of Rs. 12,29,25,049/- in accordance with Rule 8D of the IT Rules. He relied on the following cases:- 1. (2007) 111 TTJ (Mumbai) 82 ACIT Vs. Citicorp Finance (India) Ltd., 2. (2005) 93 TTJ (Chennai) 161 Southern Petro Chemical Industries Vs. DCIT 3. (2004) 83 TTJ (Mumbai) 843 ACIT Vs. Premier Consolidated Capital Trust (l) Ltd., 4. (2010) 328 ITR 81 (Bom) = Godrej & Boyce 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. This is an undisputed fact that in this case, the assessee has invested in debts mutual funds. The assessee computed disallowance u/s 14A(2) at Rs. 25,78,156/- and disallowed the same, while computing its total income. The working of the said disallowance claimed by the assessee is given herein above in the submissions made by the assessee. The AO was not satisfied with the correctness of the claim of the assessee especially the explanation of the assessee that no administrative expenditure incurred on earning the dividend income. Considering the magnitude of the investments and the dividend 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 magni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atable to the earning of taxable income (pages 22-23). The test which has been enunciated in Walfort for attracting the provisions of sec. 14A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28) 5. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO 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 income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-sec (2) does not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs ITO 310 ITR 421. The Hon'ble Supreme Court in this decision, at page-31 of the order held as under; "To attract Sec.14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec.14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.14A cannot be invoked". 16. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon'ble Supreme Court, we are of the view that sec.14A cannot be applied unless there is a proximate cause for disallowance. The onus to 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) & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the investments and dividend income received and the disallowance according to him made by the assessee u/s 14A towards administrative expenditure is very less. The assessing officer nowhere pointed out the proximate connection of other expenses not apportioned by the assessee for the earning of the dividend income. He merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to the dividend income has not been brought on record. Even the AO has not pointed out the expenses excluded by the assessee for disallowance has proximate connection with dividend income. In our opinion, the assessing officer before rejecting the disallowance computed by the assessee must give a clear cut finding having regard to the accounts of the assessee how the other expenditure claimed by the assessee out of non exempt income is related with the exempt income. No discrepancy in the claim of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. This onus has not been discharged. In "CIT Vs. Hero Cycles" (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In "ACIT Vs. Eicher Ltd.", 101 TTJ (Del.) 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In "Maruti Udyog Vs. DCIT, 92 ITD 119 (Del.), it has been held that before making any, disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In "Wimco Seedlings Limited Vs. DCIT, 107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank Vs. DCIT, 103 TTJ 908 (Del.); 2. Vidyut Investment 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the high court dismisses an appeal holding that no substantial question of law arises from the order of the Tribunal. It was held that whenever an order of the subordinate forum is carried in appeal before the higher appellate forum/court, operative part thereof merges into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be, and the decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case, except the decision of jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DC IT & Another 328 ITR 81 (Bom.). In view of our aforesaid discussion and respectively following the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. co. Ltd. Vs. DCIT & another 328 ITR 81 (Bom), we delete the disallowance made u/s 14A r.w. Rule 8D and accordingly, the ground taken by the assessee in this regard is allowed. 19. Ground no. 2 relates to sustenance of the disallowance of Rs. 9,88,29,729/- towards the payment of the sales commission to the non-resident agents. The assessing officer disallowed the commission paid to the sales agents u/s 40(a)(i) of the Income-tax Act for the reason that the assessee had not deducted tax u/s 195 of the IT. Act on such payment. When the matter went before the CIT(A), CIT(A) confirmed the disallowance u/s 37 of the Income-tax Act in the following manner:- "6.3 I have carefully considered 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 66,86,324/- to Arimpeks Dis Ticaret Ve Mum Ltd. In this regard, in the order of the CIT (Appeal), it was held that since the assessee company is dealing with the purchasers of iron ore year after year, exports are made directly; payments are received directly without being routed through the commission agents. There is apparently no justified reason for payment of commission without substantiating the authenticity of the commission agents and without having furnished reasonable proof of correspondence and adequacy of services rendered by the commission agents. Therefore, for the assessment year 2006-07 the CIT (Appeal) had held that there was no necessity for engaging the commission agents and accordingly, the commission payment was not held to be allowable as business expenditure u/s 37 of the I.T. Act. 6.5 In the present case, it is observed that the facts are very much similar to that of the case for assessment year 2006-07. For the year under consideration, assessee has paid commission of Rs. 8,26,79,634/- to M/s Mitsui & Co. Ltd., Japan and Rs. 54,90,159/-to M/s Omega Pvt. Ltd., Karachi, Pakistan. The balance amount of the claim represents service tax. During the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the ITO to consider the relevant factors and determine for himself whether commission said to have been paid to the selling agents or any part thereof is properly deductible u/s 37 of the IT Act." 6.6 In the present case, it is significant to note that assessee is an established iron ore exporter and has been exporting iron ore to the same countries year after year for substantially long time. It is also observed that the assessee has been transacting with known business concerns and therefore, there was no real necessity for an agent to render any service for promoting sales with such concerns with whom the assessee has been transacting for long. As far as Mitusi & Co., Japan, is concerned, it is pertinent to note that assessee has been exporting 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 ad ..... 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 at Goa. The CIT (A) in his order for A.Y. 2005-06, had also raised a point regarding necessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is the prerogative of the businessman to decide as to whether commission has to be paid or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength 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 in any manner. None of the recipients of commission was a related party but internationally known in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the agent to correspond with the buyer 18 25 03.02.09 We are asking the agent to convey our message to the buyer 20-21 26 13.03.09 The agent conveying message from the buyer to us 23. It was contended that it is on the principal as to how many or how much services he may require from an agent, the purpose of appointing an agent is to be introduced to a party. Once the agent has introduced a party, he may continue to get the commission as per the terms and conditions agreed between the agent and the principal. In the instant case, all payments were duly approved by the RBI and were sent through banking channel. Survey has taken place in the case of the assessee, but no contrary evidence was found which may prove that these parties were not the agents of the assessee. The disallowance was made merely on surmises and conjectures. It was pointed out that the main condition for deduction of the expenditure u/s 37 of the Act is that the expenditure should be incurred wholly and exclusively for the purpose of the business and that there is no condition to the fact that it need to have also been incurred necessarily. It is the assessee to decide whether any expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be eligible for deduction u/s 37(1) must fulfill the following conditions:- a) The expenditure should not be covered by the provision of section 30 to 36 as these sections provide its specific treatment to expenditure laid down in those sections. b) Expenditure should not be capital in nature. c) It is not to be personal expenditure of the assessee. d) It should be incurred wholly and exclusively for the purpose of business or profession. e) It should be incurred during the previous year. f) It should not be incurred for any purpose which is an offence or which is prohibited by law. 24.1 In the case of the assessee, there is no doubt that the commission paid by the assessee is not covered by the provision of section 30 to 36. There is also no dispute that the expenditure incurred by the assessee is of revenue nature and not of capital in nature. There is also no dispute about the fact that the expenditure has been incurred during the respective previous years. There is also no dispute that this expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. The expenditure so incurred by the assessee company cannot be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decided on the facts of each case, the concluding decision will be one of law. (ii) It is not necessary that the expenditure be incurred for earning profit. (iii) It is enough that the money was expended "not of necessity and with a view to directing and immediate benefit to the trade, but voluntarily on the ground of commercial expediency, and in order, indirectly, to facilitate the carrying on of the business." (iv) No hard and fast rule can be laid down to explain what the word "solely" is meant for. The expression "wholly and exclusively" used in section 37(1) does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenditure may be incurred voluntarily and without any necessity, and if is incurred for promoting the business and to earn profits, the assessee can claim deduction therefore under section 37(1) even though there was no compelling necessity to incur such expenditure. The Supreme Court, in the case of CIT Vs Malayalam Plantation (1964) 53 ITR 140 (SC), held that it is not only expenditure which directly results in benefit or advantage to the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cases of JK Woollen Manufacturers Vs CIT (1969) 72 ITR 612 (SC); Aluminum Corporation of India Ltd. Vs CIT (1972) 86 ITR 11 (SC) and CIT Vs Panipat Woollen and General Mills Co. Ltd. (1976) 103 ITR 66 (SC). Considering the true import of the expression "wholly and exclusively" it was observed by the apex court in Sassoon J Davit and Co. Pvt. Ltd. Vs CIT (1979) 118 ITR 261, that the same does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction u/s 37 of the Act if it otherwise satisfies the tests laid down by law. The bill read "any expenditure laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to substantiate the claim for payment of commission to non-resident agents by adducing specific and tangible evidence to demonstrate that the services were rendered by the sales agents to justify the commission payment as claimed by the assessee. He, thus, confirmed the order of the assessing officer for the said disallowance. Now the only issue before us is whether the assessee had discharged its onus of proving the genuineness of the expenditure incurred by the assessee or not. 27.1 The documentary evidences by way of agreements with the non-resident agents and emails exchanged with them in this regard, which were placed on record of the authorities below and also furnished at page nos. 135 to 156 of the paper book before us, clearly exhibit the nature and extent of services rendered by those non-resident agents; and the genuineness of the same cannot be doubted merely on surmises without bringing anything contrary on record. CIT (A) while rejecting this vital piece of evidence has merely stated vide para 6.5 of his appellate order that "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming vessel nomination from the buyer, which was later accepted by the assessee. Other emails show the assessee's request to the agent for opening of LC and subsequently requesting the agent for LC amendments and LC acceptances. In other such set of emails, the assessee is found suggesting amendments to the draft LC and the agent confirming / suggesting amendments to the LC. Similarly, another set of emails show the Agent advising changes in the sale contract with the buyer and the assessee accepting the same. Yet another exchange of emails shows the agent is forwarding draft revised Final Adjustment Sheet and the assessee is suggesting corrections to Final Adjustment Sheets and requesting the agent to forward the same to the buyer. More so, in one such set of emails, the assessee is seen asking the agent to convey its message to the buyer and the agent can be seen conveying message from the buyer to the assessee. Thus, there remains no doubt in our mind that the non-resident agents were actually rendering the services as middlemen in terms of their respective agreements with the assessee and, accordingly, commission was genuinely paid by the assessee for those services o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly established that the payments were made by the assessee to the buyers of iron ore abroad and no tax was either deducted or deducted belatedly in respect of such payments. The claim that such payments were ultimately payable to the ship owners will not change the nature of payments in the hands of the assessee. As far as the assessee is concerned, it has paid the amounts as demurrage and the same has been claimed as expenditure. The payments made by the assessee are clearly covered by the residual limb of section 40 (i) of the Income tax Act, which refers to 'Other sum chargeable under this Act'. The payments made by the assessee are clearly in the nature of payments chargeable to tax. The assessee has not substantiated its claim that these payments would have been subsequently paid to the ship owners by the buyers of iron ore or why such payments are not chargeable to tax. It is established law that the onus of substantiating the claim lies on the assessee who makes the claim. Therefore, considering the facts of the case and the observations made by the assessing officer and considering the fact that the assessee has completely failed to substantiate its claim as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uyer got the demurrage through the operation which are confined to purchase of goods, i.e., in relation to the ship which it had arranged for taking the delivery of the goods from the assessee/seller from India. Thus, the said income will not be deemed to accrue or arise in India and therefore the said amount is not taxable in India and is not liable to the tax deduction at source. Presuming without admitting, if the said amount is considered as demurrage payment instead of compensation, in that case demurrage charges are liable to tax u/s 172(8) of the Act in the hands of ship owners. In this regard, it is stated that section 172(8) states that the amount mentioned in 172(2) includes demurrage charges. Section 172(2) provides that where a ship carries passengers, goods, etc., then 7.5% of the amount paid or payable on account of such carriage to the owner or character on this behalf shall be deemed to be income accruing in India to the owner or charterer. Thus, as per section 172(8), the amount of demurrage will also be considered for this purpose, i.e., for computing its taxable income. Thus, the demurrage stands considered as part of Freight, i.e., the payment made u/s 172(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act. The assessee when making the payment to the non-resident is bound to deduct tax at source u/s 195 of the Income-tax Act. Having failed so, the disallowance has rightly been sustained by the CIT(A) u/s 40(a)(i) of the Income-tax Act. 31. We have carefully considered the rival submissions and perused the material on record. This is. a fact that the assessee has paid the demurrage charges to the non-resident in respect of delay in loading the ship. We find that the sum of Rs. 36,05,767/- was reimbursed by the assessee to the foreign buyer to compensate the foreign buyer for paying demurrage to the ship owner when ship came to Indian port and the assessee could not load the goods on to the ship within the limited time period. The export sales were made to the foreign Pakistani buyer on FOB basis. In view of the contract with the Pakistani buyer specifically clause 11(d), in our opinion, the assessee is bound to compensate the Pakistani buyer in respect of demurrage paid by the Pakistani buyer to the ship owner. This payment in our opinion can be regarded to be the expenditure incurred by the assessee for the sales of the goods. We do not agree with the Ld. AR that this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172. Section 194C deals with work contract including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any "resident" (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any "resident". On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections. There would, however, be cases where payments are made to shipping agents of non-resident ship owners or charterers for carriage of passengers, etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply." 33. From the perusal of this circular, it is apparently clear that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 I have considered the observations of the assessing officer and the explanation furnished by the assessee in this regard. The claim of the assessee that Education Cess and Secondary & Higher Secondary Education Cess is paid under the law for providing finance for basic, secondary, and Higher Secondary Education and therefore, such payment was for the purpose of the business is without any substance. The fact remains that the Education Cess and Secondary & Higher Secondary Education Cess are collected as part of Income Tax and Fringe Benefit Tax. The fact that the cess is applied for the purpose of promoting basic education and higher secondary education will not change the nature of the levy in the hands of the assessee. The amounts collected by way of Education Cess and Secondary & Higher Secondary Education Cess forms an integral part of the direct tax collection and therefore such payments are clearly covered under the provisions of section 40(a)(ic) and (ii) of the Income tax Act. 8.2 Further it is also admitted that the assessee had claimed deduction of Rs. 19,88,55,081/- towards the Education Cess and Secondary & Higher Secondary Education Cess, by a separate letter date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The said payment is not a fee but is a tax. In case of fees, payment is made against getting certain benefit or services while tax is imposed by the Government and is levied for which the person who pay the tax is not promised in return to get any benefit or service. The assessee is not getting any benefit or services in return by making the payment towards the education cess and secondary higher education cess. Therefore, it cannot be said that it is an expenditure incurred wholly and exclusively for the purpose of the business and is not part of tax. We do not find any infirmity or illegality in the order of the CIT(A) while confirming the disallowance made by the assessing officer in this regard. Thus, disallowance of Rs. 19,72,00,814/- is hereby confirmed. Thus, this ground stand dismissed. 36. The ground nos. 6, 7, 8 & 9 relate to the claim of the deduction by the assessee u/s 10B of the Act in respect of its 100% export oriented units at Amona in Goa, at Chitradurga in Karnataka and at Codli in Goa. During the year, the assessee claimed deduction in respect of 3 units located at Amona, Chitradurga & Codli respectively. Of these 3 units, the Codli unit is registered as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Chitradurga plant during the year 2005-06 or in the subsequent year by summarizing as under, under para 12 of its order. * "The assessee has only installed of few discrete standalone equipments which cannot be held to constitute a separate undertaking having its own identity and capable of functioning as an independent unit. * The identity of the old unit comprising of the old and existing machines & equipments, was not lost. * The increase in the production of iron ore cannot be attributed to the installation of new plant and machinery".. Therefore, in view of the above, it is clearly established that no new unit has come into existence at the Amona plant during the year 2002-03. It is only a case of reconstruction of the existing unit in which the old structures in the plant including some of the machines and equipments were repaired hand renovated and some additional machines and equipments were newly installed. Similarly, no new unit also came into existence at the Chitradurga plant of the assessee during the year 2005-06 or in the subsequent years. It is also a case of reconstruction of the existing unit involving repair and renovation of the old structure and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtakings cannot be thus held to be new undertakings in view of the old mines forming part of such undertakings. CIT(A) ultimately under para 15.3 held that the activities of the assessee in two units at Amona and Chitradurga would not amount to manufacture by observing as under: "Therefore, in the present case of the assessee, the question whether the activities of the two EOUs at Amona and Chitradurga would amount to 'Manufacture' or not has to be necessarily answered by referring to the definition of 'Manufacture' provided under section 2(29BA) of the Income Tax Act, which is applicable for the assessment year under reference. Considering this definition, it is sufficiently clear that the iron ore processing activities of the assessee at the EOUs at Amona and Chitradurga do not amount to 'manufacture'. Therefore, the claim of the assessee to adopt a liberal view for interpreting the definition of 'manufacture' cannot be accepted." 37.1 The CIT(A) is of the view that the percentage of the old machinery in the case of both the units will certainly exceed 20% of the total value of the plant and machinery. Referring to the application of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery used in the new undertaking was Rs. 26,17,714/- which was around 6.7% of the new plant & machinery. Attention was drawn to paper book Vol-l (45-48). He submitted that the details represent the part of the depreciation schedule filed along with the return and the books of the assessee were not rejected during the Financial Year: 2003-04. During the Financial Year 2008-09, the DTA unit set up in Financial Year 2002-03 was converted into 100% EOU in terms of approval from the O/O Development Commissioner, Ministry of Commerce & Industry, Mumbai, vide approval no. PER:44(2007)IAII/39-07-08 dated 28-03-2008 and the same was ratified by the Board of Approval in its meeting held on 03-06-2008 (page 41-44 of the first paper book). The premises of the undertaking were bonded and licence no.4/2008 dated 23-07-2008 was issued u/s 58 of the Customs Act at page 280 of the paper book. The conversion of the DTA unit into EOU unit became final on the receipt of Customs licence No.4/2008 dated 23-03-2008 duly bonding the premises. The unit started functioning as EOU. The information for the same was given to the Development Commissioner vide letter dated 24-07-2008. For this attention was drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no.283 of Paper Book Vol.ll. f. Letter dt.24/7/2008 intimating the Development Commissioner about the commencement of commercial production page no. 64 of Paper Book Vol.l. g. LUT page No. 76 of Paper Book Vol. l. h. Report of CA on form No.56G page nos. 10-12 of Paper Book Vol. l. i. Details of Computation of deduction u/s 10B page no.6 of Paper Book Vol.l, j. Plant & machinery- Depreciation chart/fixed asset schedule for Assessment Year 2003-04 to 2009-2010 page nos.45-48 of Paper Book Vol.l, k. Note on the production process of the undertaking page nos. 21-30 of Paper Book Vol.l. l. A note on setting up EOUs page Nos.31-32 of Paper Book Vol.l, m. A note for comparison between EOU and Non EOU profitability % page No.91 of Paper Book Vol.l. 38.3 During the survey a statement of Shri H.K.Moorthy and Shri Ulhas Kerkar both technocrats by profession were recorded. This statement is available at page 728-731 and 714 to 716 of additional paper book Vol.l. The Assessing Officer took a view that the Amona unit was set up in the year 1985 and alleged that it was not a new unit but merely a re-construction and disallowed the claim of the assessee u/s 10B of the IT Act. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23 ITR 11(Kar.) c) CIT Vs Mazagaon Dock Ltd., 191 ITR 460(Bom.) d) CIT Vs Abhirami Cotton Mills 220 ITR 84 e) CIT Vs Bongaigaon Refinery & Petrochemicals Ltd., 38.4 In respect of the finding of the Assessing Officer that no such evidence has been produced by the assessee for the date of commencement of manufacture or production. It was submitted that the assessee duly informed the Development Commissioner, SEZ, Mumbai vide letter dated 9/3/2008 that its commercial production started on 8/3/2000. Copy of this letter was also sent to the Customs Department. 38.5 In respect of the observations of the Assessing Officer that the unit is not a new unit as the assessee has already an existing unit set up in 1985 and it is a case of reconstruction. It was submitted that the guiding principles on various rulings both initial as well as recent ones when tested to the facts of the case confirm that during the financial year 2002-03 the entire unit was set up wherein communication with the Panchayat etc., particularly Panchnama and newspaper clipping brings out clearly that a complete destruction of old unit was done and altogether new plant was set up albeit with the aid of some old m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore setting up of the new plant during financial year 2002-03 and financial year 2005-06 respectively clearly shows that the process underwent a sweeping change and latest screening technology was introduced (Page-393). The details of major machinery and equipments employed used in the said unit in the old and new plant shows that the latest technology was used in the new plant.(Page 394) 38.8. It was submitted that Ore was processed/produced in Amona unit out of the Ore extracted from own mines at Goa & Karnataka and also the same purchased from third parties as per details given below; Break up of purchase of (crude ore) From own mines at Goa Rs. 45,25,03,692 From own mines at Karnataka Rs. 43,11,06,896 From third parties Rs. 3,16,15,091 Total Rs. 91,52,25,679 38.9 In the computation of deduction claimed u/s 10B in respect of Amona unit, the assessee declared cost of crude ore of Rs. 45.25 crores as part of cost production of Rs. 55.71 crores, while ore purchased was declared at Rs. 43.11 crores transferred from its Karnataka Mines + Rs. 3.16 crores transferred from third party leased mines. The beneficiation plant mainly consists of various types of conveyors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable to the AO the following additional documents and information were provided and pleadings were made before the CIT(A) as below; - Copies of bills of equipment material services amounting to Rs. 2.21 crores out of 3.96 crores since the record was very old. - Various documents impounded during survey were again submitted with CIT(A) duly drawing his attention that major dismantling and demolishing were undertaken. The CIT(A) sought remand report from the AO and considered the contents while adjudicating the appeal. 2.2 At Page 42, as per CIT(A) vide para-10.5: The assessee did not furnish evidence of new machines. Assessee's explanation The CIT(A) was explained that all capitalisation made in the earlier years stood accepted by the department under scrutiny assessments and it was difficult for the assessee to now quickly retrieve all the bills in short time at this stage. 2.3 At page 43, as per CIT(A) vide para-10.5: All old machines were not replaced. The number of such new machines and equipments 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assets, it would have achieved lesser depreciation but would have escaped full tax that it paid on the scrap value received. But in any case, the written down value of old machines was substantially lower than the threshold limit of 20% prescribed in Explanation 2 to sec.80-l(2) read with Explanation to sec.10b(2). 2.5 At page 50-53, as per CIT(A) vide para 10.8: Correspondence with Village Panchayat shows that the construction activities were actually in the nature of repairs and renovation. Appellant's explanation The CIT(A) referred to few communication with the Panchayat to make a case that it was only a normal repairs or renovation work undertaken. He did not refer to several other communications and documents which clarified that the assessee carried out major dismantling and demolition as well as new plant was set up. CIT(A) referred to various communication wherein phrases like urgent repairs and renovation etc., The CIT(A) misled and misconceived in his thought process, opted to disregard 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s own case. The facts were that the assessee owned transport vehicles like dumpers, etc. which were employed in conveying crude ore from its mines to the beneficiation plant for processing and thus, declared as plant and machinery. It was explained that instead of installing the conventional conveyor belt system from the mines to the beneficiation plant for conveying crude ore, the assessee had chosen the cost effective way of conveying it through an on-wheel conveying system i.e. through dumpers etc., and which machines did not have any other use. Therefore, for all practical purposes these were not vehicles as understood in the ordinary sense, but plant and machinery in the case of the assessee. Accordingly, the assessee claimed investment allowance u/s 32A on the said assets, but it was disallowed by the assessing authority under the averment that those assets had not been used in the manufacturing process. After passing through the course of appellate proceedings before the CIT(A) and the ITAT the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soning given by the High Court, in the decisions noted by us earlier, is in our opinion, unimpeachable. This court had, as early as in 1961 in Chrestian Mica Industries Ltd. Vs State of Bihar (1961) 12 STC 150 defined the word production albeit in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning 'amongst other things that which is produced, a thing that results from any action, process or effort, a product, product of human activity or effort. From the wide definition of the word production, it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word production, since ore is a thing which is the result of human activity or effort. It has also been held by this court in CIT Vs N.C. Budharaja & Co., (1993) 204 ITR 412 that the word production is much wider than the word 'manufacture'". We are therefore, of the opinion 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 bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nits are always at a safe distance with each other because mine blasting would otherwise disturb the functioning of the processing units. EOU unit has to be a custom bonded area but the mines are spread over kilometers in area which cannot be made custom bonded. Thus, the mines cannot be made part of the EOU unit in any manner. However, even if the extraction of iron ore is carried out by the assessee at mines owned by him or by third party (which cannot be covered under EOU) unit as explained above) and only the processing is carried out by EOU unit, even then the assessee will be eligible for 10B deduction for the said EOU as the assessee is extracting as well as processing the ore. This is the decision of the Chowgule because in that case the EOU was using the iron ore extracted by the said company from its own mines and from the mines of Antao Brothers which could not be part of the EOU unit of that assessee is any manner as explained above. Thus, the basic condition for allowing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presumptuous. Moreover, it has already been explained that in Hon'ble Supreme Court's judgment in 271 ITR 331 read with Bombay High Court's ruling in 266 ITR 126 in the case of Sesa Goa Ltd., it has actually decided that extraction or ore and processing of ore are independently held as production'. Alternatively, by reference to the decision of the Tata Tea Ltd. Vs ACIT (2011) 338 ITR 285 (Ker.) and Madhu Jayanti Intl. Ltd., Vs DCIT (2012) 137 ITD 377 (Kol.)(SB), it was contended that in case of an EOU regard has to be given to the definition of manufacture as contained in EXIM policy. Even if the word manufacture had been inserted in the IT Act, it is submitted that it would not deter to draw the definition of production from EXIM policy. As it is settled law, that production is wider than the word manufacture and every case of manufacture can be included in production. The definition given in EXIM policy for manufacture would stand good for the word '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 lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol Board vide its application dated 09-09-2005 for its consent for establishment under Water Act and Air Act for expansion of iron ore mining capacity from 16 MTPA to 2.5 MTPA. Subsequently, the management of the company also underwent a change from Mitsui group with M/s Vedanta Group. Due to this expansion/establishment project could be completed during the FY 2008-09. The following investments were made which resulted in creation of new unit in place of the existing unit. Sl. No. FY: Plant & Machinery (Rs. in crores) 1. 2005-06 0.94 2. 2006-07 0.36 3. 2008-09 7.04 Total 9.18 39.2 The value of old plant & machinery used in the new plant was at Rs. 6,93,596/- i.e., WDV was on 01-04-2005 and the value of plant & machinery as on 31-03-2006 was at Rs. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 of the paper book, vol.l. No crude or processed ore was purchased from anyone in this unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusher, (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 CIT(A) has averred that as per the assessee the entire plant was demolished in the FY 2005-06 itself. But except for a bill of M/s Bhella Constructions containing an expenditure of Rs. 3.522 towards demolition or dismantling of the old plant no other evidence has been furnished in this regard. Appellant's explanation; However, it is categorically submitted that nowhere such point was made by the assessee. Admittedly, it was a renovation project carving out new unit done in a phased manner spread over 4 long years. Thus, there was no question of demolishing the entire plant in on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, addition to plant & machinery was ever disturbed and no adverse comment was ever made in respect thereto by the AO. Thus, the same stands accepted in scrutiny of the department. Accordingly, it is submitted that the CIT(A) had no authority to travel back to those earlier years to hold otherwise that the impugned bills showed that the related expenditure was in the nature of repairs. This was beyond the jurisdiction of the CIT(A) and therefore, the said finding is perverse and has no legal footing. At page 67 as per CIT(A) vide para 11.7: Production data shows that it increased without investment in plant & machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partially closed in the year 2006-07 due to the fact that substantial expansion was underway in that year and therefore, production in that year as just 10.71 lakh MT which, as a consequence of the said expansion, grew up to 21.26 lakh MT in the following year i.e., 2007-08. There is nothing unusual about it. Moreover, it is not understood how production can increase is on a large scale. Therefore, no parity can be drawn between investment in plant & machinery in the year 2007-08 and the production level achieved in that very year as has been attempted by the CIT(A). At page 68 as per CIT(A): No major plant & machinery ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tradurg 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 to the invite in a details manner. Appellants' explanation The judgment in CIT Vs Sesa Goa Ltd., (2004) 271 ITR 331 was delivered by the Hon'ble Supreme Court in assessee's own case. The facts were that the assessee owned transport vehicles like dumpers, etc. which were employed in conveying crude ore from its mines to the beneficiation plant for processing and thus, declared as plant and machinery. It was explained that instead of installing the conventional conveyor belt system from the mines to the beneficiation plant for conveying crude ore, the assessee had chosen the cost effective way of conveying it thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 preferred further appeal before the Hon'ble Supreme Court, where the same question as put before the High Court was re-examined by the Apex Court. The Apex Court held as under (271 ITR 331).... The reasoning given by the High Court, in the decisions noted by us earlier, is in our opinion, unimpeachable. This court had, as early as in 1961 in Chrestian Mica Industries Ltd. Vs State of Bihar (1961) 12 STC 150 defined the word production albeit in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning 'amongst other things that which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 meaning. It is not necessary that both the extraction of iron ore and processing of iron ore must be carried out by the EOU itself to claim exemption u/s 10B. It must be understood that the mines and processing units are always at a safe distance with each other because mine blasting would otherwise disturb the functioning of the processing units. EOU unit has to be a custom bonded area but the mines are spread over kilometers in area which cannot be made custom bonded. Thus, the mines cannot be mad part of the EOU unit in any manner. However, even if the extraction of iron ore is carried out by the assessee at mines owned by him or by thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assertion 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, is nothing but presumptuous. Moreover, it has already been explained that in Hon'ble Supreme Court judgment in 271 ITR 331 read with Bombay High Court's ruling in 266 ITR 126 in the case of Sesa Goa it has actually decided that extraction of ore and processing of ore are independently held as production'. Codli Unit 40. The assessee claimed exemption u/s 10B in respect of Codli Plant at Rs. 87052701/-. The assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 law that the said unit is engaged manufacturing or production of an article or thing on the same decision which has been relied on in respect of similar issue arising in other two units. 40.2 On the objection of the AO that the assessee has not maintained separate books of accounts for EOU units and non-EOU units submissions made in respect of other units were reiterated. 40.3 On the objection of the AO that no satisfactory evidence was produced by the assessee about the date of manufacturing or production. It was submitted that the assessee submitted that the approval dated 27.10.1997 (pg.33-37 PB). In the approval one of the conditions was that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of iron ore the tailings can never be considered as iron ore extracted from the mines and therefore, recycling of such waste materials cannot be considered to be the same as processing of extracted iron ore.' This assertion rather proves the stand of the appellant that the output of Codli unit is a "new" product having different characteristics and use. 2.2 At Page 105 as per CIT(A) vide para 21: The unit is not engaged in any manufacturing or production of article or thing since the unit is not engaged in 'extraction and processing of iron ore', which together constitutes 'production', as interpreted by the Supreme Court in Sesa Goa 271 ITR331. Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ITA No. 162/PNJ/2006 was immediately rectified by the same bench in Miscellaneous Application moved by the assessee in M.A. No. 23/PNJ/2007 order dated 19/07/07 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 assessee was only 'processing' iron ore but was not 'extracting' the ore (Please see para 5 of order dated 19/07/07 in MA). But the Hon'ble ITAT found during the MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 Madhu Jayanti International Ltd. Vs. DCIT (Kol. ITAT)(SB) . In case of an EOU, regard has to be given to the definition of manufacture contained in the relevant EXIM policy. Even if definition of "manufacture" has been inserted in the Income-tax Act, it is submitted that it would not deter to draw the definition of production from EXIM policy. Since it is settled law that production is wider than manufacture and every case of manufacture can be included in Production, hence the definition given in EXIM policy for "manufacture" would stand good for the word "Production" [Please refer to Page Nos. 174-179 of (Initial) PB Vol. (I) 2.4 At Page 112 as per CIT( A) vide para 22: The assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 Amount (Rs.) Ore Mining Cost (Ore Input Cost from own mines in Goa) 45,25,03,692 Ore Dressing Cost 10,46,39,225 Total (as per 10B Computation Sheet): 55,71,42,917 Chitradurga Unit Ore Mining Cost (Ore Input Cost from own mines in Karnataka) 20,27,01,458 Ore Dressing Cost 6,90,45.428 Total (as per 10B Computation Sheet): 27,17,46.886 Codli Unit Ore Mining Cost @ Nil Ore Dressing Cost 2,49.57.787 Total (as per 10B Computation Sheet): 2,49, 57,787 @ Raw-material for Codli is Tailings' which is a total waste and has no value. Thus, ore input cost has been duly and correctly declared in the computations for deduction claimed u/s 10B in respect of all thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... U No approval 28.03.2008 15.02.2008 Ratified by Board No ratification 03.06.2008 14.01.2011 S. 10B claim A.Y.2005-06 AY. 2009-10 A.Y. 2009-10 Claim u/s. 10B Rs.8,70,52,701 Rs.257,23,14,771/- Rs.185,34,16,650/- Section 80IB of the Act claimed in respect of all the three units of Codli, Amona and Chitradurga division of Rs. 451,27,84,122/-. 41.1 It was stated that all the three units commenced processing of iron ore in the years 1973, 1958 & 1952. Section 10B of the Act, came under the Statute Book by Finance Act, 1988 w.e.f. 01.04.1989. In the assessment year 2005-06 (Codli unit), assessment year 2009-10 both Amona unit and Chitradurga unit made a claim of deduction u/s.10B of the Act. All the three units as stated above had commenced processing nearly 25 years earlier to the assessment year in which the claim u/s. 10B of the Act was made. Admittedly, the three units under which Section 10B of the Act claim has been made are not new units as contemplated under Section 10B of the Act. Relaxation of the new unit has been subsequently provided in the section by way of amendment only under certain conditions stipulated in the section, which were stated as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery cannot be termed as a new undertaking. v. The judgments relied on by the assessee of the Apex court interpreting of Section 15C of the Income Tax Act 1922, will not be applicable to the facts of the present case as the wordings of Section 10B of the Act and 15C of the Act are not identical. The words "beginning with the assessment years relevant to the previous year in which the undertaking begins to manufacture or produce article or thing", which is prominent and the genesis of Section 10B of the Act is totally absent in Section 15C of the Act. Hence, the principle enunciated by the Apex court in those judgments cannot be made applicable to the facts of the present case. vi. In fact, when the legislature has deemed it fit to extent such addition to machinery as a new machinery. It has specifically stated so as in Explanation to Section 80IA of the Act. Reliance was placed on the following cases;- 1. (2011) 334 ITR 157 (Kar) Sami Labs Ltd., Vs. ACIT 2. SLP(C).No.14937/2011 M/s. Sami Labs Ltd., Vs. ACIT 3. Board Circular No.1 of 2005 dated 06.01.2005 4. (1990) 181 ITR 518 (Kar) CIT vs. Nippon Electronics (India) (P) Ltd., 5. (1990) STC 270 Falmer Jeans Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alatha Gargya Vs. CIT, A.P. (2003) 9 SCC 510 d. "Relevant assessment years" Means any assessment years falling within a period of TEN CONSECUTIVE ASSESSMENT YEARS referred to in this section. [Section 10B Explanation 2(v)]. The claim u/s.10B of the Act can be made: a. In respect of a new unit. b. In the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce article or thing. c. Period of ten consecutive assessment years. d. Exempted only if assessee applies and is exempted by the Assessing Officer. Admittedly, the assessee has not satisfied any of these mandatory conditions. Hence assessee is not entitled to the claim u/s.10B of the Act. e. Deduction of such profits and gains as are derived 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of Codli Unit as well as Chitradurga Unit. 41.2 The learned DR made following written submissions ;- "Conditions stipulated by Section (Sub-section 2 of Section 10B) h. It manufactures or produces any articles or things or computer software. [Section 10B(2)(i)] a. Facts: - In the Codli unit, Amona Unit as well as Chitradurga Unit, assessee is carrying on the process of feeding iron ore which is grinded, washed of impurity as well as dry blown 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the jurisdictional High Court, the Codli unit, Amona Unit and Chitradurga Unit carries on (iii) washing, screening and dressing the ore. It is the contention of the revenue that this washing, screening and dressing of the ore or such other process carried on in the benefication plants of the three units does not amount to manufacture or production. It is further submitted that this controversy is now fairly concluded by the judgment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The same products are fed. This chain of production to ultimate sale cannot be cut into number of independent activity. Therefore the contention of the assessee is incorrect to say that this is an independent unit. The input which was made earlier and now is the same. The contention that it is the end product, tailings, by- products etc., are all contentions made to divert the attention from the actual controversy. f. Case Laws: 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly must be - and this is brought out by the section itself - of a business already in existence. There must be a continuation of the activities and the business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the 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 year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with the orders of the tax authorities below as well as the material referred before us from the paper books. We have also gone through the various case laws as relied upon from both the sides. In respect of all the three units established by the assessee which are approved as EOU by the competent authority, the assessee has claimed exemption u/s 10B of the Income-tax Act, 1961, which was denied by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tailing thicker for water recovery before the same is sent to the tailing pond as waste material. 42.1 Each of these units was approved as EOU unit by the Development Commissioner on the following dates, which were ratified by the Board of Approval on the dates detailed as under respectively: Amona Chitradurga 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier concluded on 20/12/2012 after hearing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent outside the assessee company is still 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to take a different view 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;process' was included 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in clause (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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 of ore mixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent 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 marketable and had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Authorities whether the different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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), inter alia, observed as follows: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under para 14 of their order dt. 12.7.2007.) Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 packs. In fact, the assessee is exclusively engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gency'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. Act, 1961 and claimed exemption under that section. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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 of 2000 is that words "and segregation" which were appearing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the exported consumer products, blended by Assessee in its said fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar 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 packing of tea for export may not be manufacturer or producer of any other a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? In this case, the Hon'ble Supreme Court after discussing various cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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' as after processing marble block no more remains as marble block. This decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 discipline. Once the decision of Special Bench or Third Member has come on similar issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 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 statute during the assessment year 2002-03 to which year the co-ordinate bench was entrusted with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." 45.7 We noted that the coordinate Bench in the case of Chowgule & Co. Ltd. ITA No. 162/PNJ/2006 deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational 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 exactly similar to the facts of the assessee, in the case of Chowgule & Co. Pvt. Ltd. Vs Union Of India (1981) 1 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 3,96,10,020/- during the year 2002-03 and in Chitradurga unit during F.Y. 2005-06 to 2008-09 Rs. 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 previously Used at Amona plant. Likewise, at page nos. 65-66 similar charts in respect of Chitradurga unit have been given. Column 'Additions' has been left blank. These charts have been compiled by the CIT(A) or by the department. This gives an impression as if no addition to plant & machinery had been made during the financial years concerned in these plants by the assessee while we verified from page 45 to 58 of first PB th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 3,96,10,020/- during the FY 2002-03, whereas the WDV of the old plant used in the new undertaking was just Rs. 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 plant and machinery installed in 100% EOU Units when in fact mining division is not part of 100% EOU as per the application made by the assessee and the approval allowed by the competent authorities to ascertain whether substantial expansion had taken place in the FY 2002-03 at Amona plant or not. Similarly, we find force in the submissions of the Ld. AR in the absence of any contrary evidence that the present unit in Chitradurga, Karnataka was initially set-up and ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unit is not set-up. 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. (iii) That in the case of Amona plant, correspondence with Village Panchayat shows that the construction activities were actually in the nature of repairs and renovation. (iv) That the assessee had incorrectly claimed that the entire existing plant at Chitradurga was demolished in the FY 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been examined by the AOs and even some disallowances had been made in respect of depreciation on assets other than plant & machinery, which was not disturbed, hence, accepted as correct by the AOs. The copies of the said assessment orders were furnished. Thus, when the factum of capital investment in plant & machinery in those years stood accepted by the department, it is beyond the jurisdiction of the first appellate authority to travel back to the completed assessments and hold otherwise. Moreover, these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. There is no cogent evidence or material being brought on record by the revenue which may prove that the old unit remains in existence merely by reconstituting the same. 45.15 We have gone through the various cases relied on before us. These cases laid down as under:- (i) CIT Vs. Mahaan Foods Ltd. (2009) 177 Taxman 274 (Del) : (2008) 216 CTR (Del) 148: "12. As per findings of fact recorded by the Tribunal, it has been stated that in the present case the old undertaking no longer existed and remained identifiable. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the capacity of the unit gradually increasing and the production so made was not experimental but was commercial. This being so, the appellant's undertaking must be regarded as having been newly established when it had begun to manufacture or produce articles by 31-3-1957. As 1957-58 was the first assessment year... 13. This is a case where the manufacturing capacity of the appellant was increased on a licence being granted from 13.5 tons per day to 20 tons per day. In other words, these hooker cells were installed and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undred 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." 18. Therefore, registration as a one hundred per cent EOU is a sine qua non for claiming deduction under s. 10B of the Act. Further, as is available from the copy of registration of the unit as a one hundred per cent EOU (assessee's paper book 71 to 74), the unit was duly approved by the Board appointed in this behalf by the Central Government. In Tube Investments of India Ltd. vs. Asstt. CIT (2009) 121 TTJ (Chennai)(TM) 577 : (2009) 20 DTR (Chennai)(TM)(Trib) 244 : (2009) 117 ITD 239 (Chennai)(TM), it has been held that a one hundr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 Rs. 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 implements transferred were of insignificant value as compared to the whole assets and literal construction of cl. (i) of s. 15C(2) would defeat the very purpose of enacting the provisions - The key to interpretation is that the new undertaking should not be 'formed' by transfer of building, plant or machinery - Emphasis is on formation not on use. 45.16 We find that the following guiding principles emerge for the reckoning of a new unit based upon various land mark rulings and also find that - (i) There was infusion of new capital by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 course of the hearing, we noted that the assessee while computing the exemption u/s 10B has debited ore extracted from own mines in Amona unit as well as Chitradurga unit at cost of Rs. 45,25,23,692/- and Rs. 20,27,01,458/- respectively, while in view of provisions of section 10B(7) read with section 80-IA(8) the assessee is required to transfer the crude ore extracted from its own mines at market value for determining the true profit derived by the 100% EOU for the purpose of computing the income illegible for exemption u/s 10B. We also noted that the assessee has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 10,91,79,435/- and Rs. 10,01,21,951/- in respect of iron ore division and Rs. 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 article or thing and therefore, the decision of the Hon'ble Supreme Court in the case of the assessee 271 ITR 331 relating to additional depreciation is not applicable. The said decision relate prior to 1.4.1999. According to him, there is no change either in the name or in the composition of the iron ore before extraction and after extraction and processing and the conditions as laid down u/s 2(29BA) are not fulfilled. Similarly, it was held that in the case of conversion of coal into coke there is no different chemical composition or integral structure in the new article and it has no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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; "iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing (or in the business of generation or generation and distribution of power) a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii): Provided that no deduction shall be allowed in respect of- a) Any machinery or plant which, before its installation by the Assessee, was used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 submissions of the assessee noted that the assessee has not claimed the sum of Rs. 2,60,32,608/- as Research & Development expenditure neither in the books of accounts nor in the computation of income. The AO has treated this expenditure which were incurred in usual course under various heads to be scientific research as in the Director's report such expenditure was classified as expenditure for Research & Development. It was also noted by him that out of total expenditure of Rs. 2,60,32,608/- an amount of Rs. 65,77,232/- was considered capital expenditure by the assessee and only the balance amounting to Rs. 1,94,55,376/- d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 forward contract. Thus, this is not a fit case which warrants our interference and we accordingly, dismiss the third ground taken by the revenue. 51. The last ground in revenue's appeal relates to deletion of disallowance of the expenditure incurred for the issue of bonus shares. This issue, in cur opinion, is no more res-integra in view of the decision of the Hon'ble Supreme Court in the case of CIT Vs General Insurance Corpn. 286 ITR 32 (SC), which has been followed by the CIT(A). We therefore do not find any merit in the ground taken by the revenue accordingly, we dismiss the same. 52. In the result, the appeal filed by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
