TMI Blog2013 (11) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... i Dinesh Boob For the Respondent : Shri N. A. Joshi- D.R. ORDER Per N. K. Saini, A.M. This appeal has been filed by the department against the order dated 11/03/2013 of ld. CIT(A), Johdpur. The following grounds have been raised in this appeal: 1. The CIT(A) has erred in not appreciated all the facts of the case properly and in giving finding that a new marketable item with substantial value addition came in to existence as a result of various process of manufacture/production carried out by the assessee on the items purchased in its raw form amounting to Rs. 2,64,20,904/ -. 2. The CIT(A) has erred in deleting disallowance of claim made u/s 10AA to the extent of Rs. 2,64,20,904/- for goods traded and not manufactured by it as eligible articles. 3. The CIT(A) has erred in relying upon facts and scrutiny assessment order for A.Y. 2007-08 and 2008-09 in allowing exemption u/s 10AA in the assessment year 2009-10 as the AO had examined the books of accounts in the year under consideration and therefore, had given finding that there was no manufacturing activity on the goods purchased and disclosed under heading "VAT free goods" amounting to Rs. 2,64,20,904/-. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 10AA as used in section 80lA of the lT Act. In the section 10AA(1), the Expression is as " hundred percent of profit or gains derived from the export of such articles or things or from services " and in section 80lA(1), includes any profits and gains derived by an undertaking ". Hence, the CIT (A) ought to have followed decision of the Hon'ble SC in case of M/s Liberty lndia. 12. The CIT(A) has erred in giving finding that the provision of section l0BA are similar to the provisions of section 80HHC. The CIT(A) has not noticed that in clause "bba" of explanation to section 8OHHC, the expression "profits of the business " is defined and it includes income accrued/received from DEPB/DDB, where as there is no such definition in section 10AA. The Sub- Section 7 of section 10AA gives a formula for determination of eligible deduction only." 2 Vide grounds No. 1 to 8, the grievance of the department relates to the deletion of disallowance of claim made by the Assessing Officer under section 10AA of the I.T. Act, 1961 (hereinafter referred to as "Act", for short). 3. The facts related to this issue in brief are that the assessee has filed e-return of income on 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,89,531/- 7. M/s. J.J. Handicraft 12,35,808/- 8. M/s. Jeevan Ram Lohar 10,60,535/- 9. M/s. Bhiya Ram 10,53,680/- 10. M/s. R.K. Handicraft 7,49,443/- 11 M/s. Garib Nawaj Iron and Steel Work 7,38,600/- 12 M/s. Krishna Handicraft 3,77,625/- 13 M/s Om Prakash Lohar 4,83,531/- Total 2,54,46,185/- 4. The Assessing Officer further observed that what the assessee has purchased were handicraft items and what the assessee had exported were also handicraft items, hence, there was no change in the name, character or use. Therefore, it was established that the assessee has exported the articles and things not manufactured by it, but had exported trading items. Therefore, assessee was not entitled for exemption under Section 10AA of the Act in respect of goods not manufactured by it. Accordingly, exemption of Rs.3,18,08,031/- under section 10AA of the Act claimed by the assessee was disallowed to the extent of profit from export of trading goods, which was worked out as under:- Total purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stated that the finding of the Assessing Officer was wrong and contrary to the voluminous record relating to purchase of raw material, processing of raw material, wage, exports invoices and various other relevant documents required to be maintained under the law relating to SEZ, produced by the assessee from time to time before the Assessing Officer. Therefore, the findings of the Assessing Officer were clearly contrary to contemporary physical verification and deep scrutiny of entire inputs and dispatches required to be made by the Customs Authorities in manufacturing units in SEZ according to the provisions contained in the customs and exercise rules and regulation and rules relating to the SEZ. It was explained that the assessee was engaged in the business of manufacturing of artistic wooden/iron/marble/glass handicrafts items and the unit is situated in Special Economic Zone at RICCO Boranada, Jodhpur. It was stated that exemption under section 10AA of the Act is given to such units established under SEZ Act, 2005. It was further stated that for setting up of any unit in any SEZ zone, first permission from Development Commissioner of the SEZ is required. The proposal is sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r purchase by registered dealer to industrial unit established in SEZ. It was further stated that the activities carried out by the assessee had been accepted as manufacturing and accordingly, approval for setting up of manufacturing unit was granted in accordance with the provision of the SEZ Act. Once the same has been accepted as a manufacturing unit by the SEZ in accordance with the rules and regulations governing SEZ units, it should be treated implicit and implied that the unit has been approved as a manufacturing SEZ unit by the board. It was stated that the Assessing Officer examined the issue in A.Y. 2007-08 2008-09 under Section 143(3) of the Act and the entire relevant evidence i.e. purchase vouchers, export invoice, manufacturing expense, labour records to show the details about process of manufacturing/production carried out by the assessee and after such scrutiny and investigation, the Assessing Officer had accepted that the entire activity carried out by the assessee amounted to manufacture/production in SEZ, which was eligible for deduction under Section 10AA of the Act. It was further stated that the unit of the assessee was duly registered as a manufacturing uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITEM 1 Wooden Photo Frame with while Metal Fitting Antique Finish 40 Euro 3.60 Rs. 62.45 225.00 185.00 ITEM 2 Iron Clock 20cm Dia with Punching Med N/A 110+55 = 165 USD 7.67 Rs. 50.25 385.00 220.00 ITEM 3 Iron Decorative Round Try On legs with Punching Nicle Antique 400 +275 = 675 Euro 23.00 Rs. 66.20 359.00 194.00 6. It was stated that the assessee was fully engaged in business of manufacturing/production of handicraft items exported by it, which was further corroborated by the fact that assessee purchased various items, which were used in converting the raw material purchased into finished products. The details of such items are as under:- Polishing item Rs. 9,84,776/- Nicle Plating other plating material Rs. 45,11,844/- Component (glass, clocks etc.) Rs. 21,59,358/- Raw material (weight matter etc.) Rs. 15,35,253/- Hardware Rs. 1,30,344/- Packing materials Rs. 51,75,039/- Misc. expenses Rs. 1,82,756/- Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in (1989) 1 (SC) 602. 7. It was stated that a new distinct and different marketable item namely finish item of handicraft with substantial value of the addition, came into existence as a result of various process of manufacture/ production carried out by the assessee on the item purchased on its raw form/in the form of Skelton and the name, character and user of the raw material/semi finished/unassembled items purchased by the assessee become totally different marketable and exportable products having different name, description, character and user as is evident from respective purchase invoice duly certified by the custom authorities. It was also stated that the meaning of the word "production" is very wide. Section 10AA of the Act uses the expression "manufacture" or "produce" and the expression "produce", production have a much wide meaning as compared to the meaning of the word "manufacture". The reliance was placed on the judgment of the Hon'ble Supreme court in the case of CIT Vs. Sesa Goa Ltd. reported in 271 ITR 331 (SC). 8. Learned CIT(A) after considering the submissions of assessee observed that the assessee was engaged in the business of handicraft items and purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observation of the Assessing Officer that the assessee purchased handicraft items and also exported them, hence, there was no change in the name, character and use was not correct, since, the raw materials purchased were Skelton, which were utilized in manufacturing, activity to prepare finished products with distinct name, character or use. Learned CIT(A) pointed out that the Assessing Officer allowed the deduction of Rs. 53,87,127/- only, which basically included consumable items utilized for manufacturing, on the contrary as per the assessee by doing a manufacturing process with the help of consumable item the VAT free raw material i.e. the skelton were given a distinct name, character or use which was quite different from the raw material. Therefore, the Assessing Officer was not justified to restrict the disallowance to the tune of Rs. 53,87,127/-. Learned CIT(A) also referred to the definition of "manufacturing" given in Export Import Policy applicable for 100% EOU and discussed the same in para 6.5 of the impugned order, for the cost of repetition, the same is not reproduced herein. Learned CIT(A) was of the view that the definitions given in different relevant provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow chart of the process, learned CIT(A) was of the view that a new marketable item with substantial value addition came into existence as a result of various processes of manufacture/production carried out by the assessee on the items purchased in its raw form i.e. VAT free goods. Learned CIT(A) also observed that the deduction under section 10AA of the Act had been allowed after deep examination in the scrutiny assessment. He referred to the A.Y. 2007-08 2008-09, wherein the Assessing Officer allowed the claim and verified the SEZ activities and relevant facts, evidence and report of the income tax Inspector about physical verification of the manufacturing activity and had granted the exemption under section 10AA of the Act. He also pointed out that the Assessing Officer had held that w.e.f. 03/01/2007 i.e first year's business of the assessee, the taking of goods commenced form SEZ, the assessee was eligible for 100% deduction under section 10AA of the Act, which was also allowed in subsequent orders by the Assessing Officer and there is no change in the business activities of the assessee as compared to the earlier years. Learned CIT(A) categorically stated that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which proved that the assessee was engaged in the manufacturing activity and even the Assessing Officer had not doubted the eligibility under section 10AA of the Act but restricted the claim of deduction. Learned CIT(A) held that the assessee was eligible for deduction under section 10AA of the Act and the Assessing Officer was not justified in restricting the deduction of claim under section 10AA of the Act to the extent of Rs. 53,87,127/- only. He accordingly, allowed the claim of the assessee. Now, the department is in appeal. 10. Learned D.R. strongly supported the order of the Assessing Officer and submitted that the handicraft goods were purchased by the assessee for export as handicraft goods, so it was a trading activity. Therefore, the Assessing Officer was fully justified in disallowing the claim of the assessee for exemption under section 10AA of the Act and the learned CIT(A) wrongly allowed the claim in respect of those goods purchased and traded by the assessee. In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that in the preceding A.Y.s 2007-08 2008-09, the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and carefully gone through the material available on record. In the present case, it appears that Assessing Officer disallowed the claim of the assessee mainly on the ground that assessee purchased VAT exempted goods amounting to Rs. 3,43,48,670/-, which were in fact, finished handicraft items, because only handicraft items are VAT free under Schedule I of Rajasthan Value Added Tax, 2003. On the contrary, the claim of the assessee is that the goods purchased by it were unfinished handicraft items, which were also verified by the custom authorities, who clearly remarked on the purchase invoices as "unfinished items". In our opinion, the view taken by the Assessing Officer was not correct because the assessee purchased unfinished handicraft goods and applied various processes like cutting, polishing, repairing, remaking etc. and for that purpose, incurred expenses amounting to Rs. 56,47,777/- for labour, which has not been doubted by the Assessing Officer. The assessee also incurred electric expenses of Rs. 6,56,987/- which was also accepted by the Assessing Officer. The assessee was engaged in manufacturing activities, this fact is established from various certificates issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee manufactures the articles of its own. The submission of the assessee was examined with reference to books of account, purchase bills/vouchers etc. produced/filed. Considering all the facts and circumstance of the case and after discussion with the ld. A/R of the assessee and partners of the firm, it is found that the assessee is eligible for 100% exemption, being second year of the business. 13. Similarly, for the A.Y. 2007-08 copy of which is placed at page Nos. 240 to 246 of the assessee's paper book. The Assessing Officer in the order dated 03/04/2009 in para 4.1, 4.2 observed as under:- "4.1 The assessee was asked vide order sheet noting dated 12/03/2009 to establish its case to cover by clause (iii) of explanation 1 to section 10AA (8) of the Act i.e. manufacture shall have the same meaning as assigned to it in clause (r) of section 2 of the SEZ Act, 2005. The assessee vide letter dated 23/03/2009 has explained as under:- "THAT assessee is manufacturer of all types of handicrafts. It is labour oriented unit and no heavy machinery is used for production. There is no fixed system of manufacturing; it depends upon the order of export. As and when assessee receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime hence assessee's try to do the work in parts and final finishing and shaping of the item is done in inhouse. Assessee is having good and efficient staff which is sufficient for it working and all the staff is on roll and also having some contractors which are also registered under assessee and working in assessee's premises and P.F. and E.S.I liability is taken by the assessee if it is not paid by the contractor. Hence, directly and indirectly assessee gives employment for the manufacturing of its item through contractor also. Contractorship is must in this trade due to large volume of labour turnover. As assessee if keeps the employee on his roll and after two three months he left and he has to give explanation for the same to the PF and ESI department, hence it create one more problem. Second in contractor ship assessee has to pay only for the work or items which he has completed and no payment without work if there is no work of said type with assessee. Assessee in handicraft industry due to variety of items each person or team of persons are specialized in the special work, which is also as needed from order to order. Hence, assessee prefer's contractor over the direct empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The Section under interpretation before Hon'ble Supreme Court was 80IA. In Section 80IA, no formula for computation of profits derived by the undertaking is laid down, whereas in Section 10BA and Section 80HHC formula is prescribed for the purpose. Therefore, in our considered opinion, Section 10BA and 80HHC are more nearer to each other, and whatever interpretation of 'derived from' is given in any decision in which Section 80HHC is involved, would also mutatis mutandis to the interpretation of Section 10BA. The Hon'ble Apex Court in the cases of Topman Exports vs. CIT reported in 67 DTR 185 (SC) and ACG Associated Capsules Pvt. Ltd. Vs. CIT reported in 67 DTR 205 has recently held that DEPB is chargeable as income and Cl. (iiib) of Section 28 in the year in which the assessee applies for DEPB credit against the exports whereas the profit on transfer of DEPB by the assessee is chargeable as income under Cl. (iiid) of Section 28 in his hands in the year in which he makes the transfer. The Mumbai bench of Hon'ble Income Tax Appellate Tribunal in the case of Arts and Crafts Exports vs. Income-tax Officer reported in 66 DTR 69 (Mumbai), after considering the decision of Liberty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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