TMI Blog2014 (1) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... ersus M/s ORACLE SOFTWARE INDIA LTD. [2010 (1) TMI 9 - SUPREME COURT OF INDIA] - In each case when an issue of this nature arises for determination, the Department has to study the actual process undertaken by the assessee - If an operation/process rendered a commodity fit for use for which it would otherwise not be fit, the operation/process fell within the meaning of the word "manufacture" - The Department that, in all such cases, they should have a panel of experts who may be engaged in appropriate cases so that the cases need not be remitted - CIT(A) has not obtained any report from an expert to conclude that the new product which has come into existence by undertaking the process of mixing and grinding is on account of manufacturing process but has accepted the contention of Assessee - A definite finding is required to determine as to whether the activity of the assessee can be termed as manufacture in the light of the requirement of the Act so as to enable the Assessee to claim deduction u/s 80IC. Higher gross profit – Held that:- The Assessee has submitted the reason for having gross profit in excess of 70% to be on account of saving in excise duty, VAT, higher price char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire net profit of Rs 3,03,68,283/- earned by the Assessee was claimed as exempt u/s 80IC of the Act. The Assessee was asked to furnish various details and justify its claim of deduction. On perusing the details, AO noticed that Assessee had achieved a huge turnover of Rs 4.31 crore within a very short time of two and half months and the turnover was out of the production of two machineries (known as Ball Mills) which was used for mixing and grinding of materials. He also noticed that the Assessee had shown G.P of 71.38% and N.P. of 70.42% which according to him was not possible in normal course of business. To understand the manufacturing process and to undertake spot inquiry of the factory premises,, AO requested DIT Investigation, Kolkatta to conduct spot inquiry of the factory premises at Khasara Manpur. AO in the order has noted that DIT, (Investigation) in its report has interalia submitted that on the day of visit, the factory was not in running situation though it was not a official holiday, the factory was managed by only one person, there was no raw material or finished products or machineries except two Ball Mills which were also rusted from inside, only 5 bags of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in manufacture or production of an article or thing. The appellant is engaged in the activity of blending and mixing (with the help of two ball mills) different Reactive dyes numbering more than 60. The A.O. observed that as seen from the certificate issued by the State Pollution Control Board the appellant was granted permission to operate a unit for blending of reactive dyes at Manpur, Sikim. The A.O. held that such an activity does not amount to manufacture. The appellant has not disputed that they are engaged in the activity of only mixing and blending reactive dyes. It is contended by the Ld. A.R., that vide para 8 of chapter 32 of the Central Excise Tariff of India, conversion of unformulated, unstandardised or unprepared forms of synthetic organic dyes by addition of dispersing agents or diluents amounts to manufacture. The 'Central excise Registration certificate' dated. 30/08/06 categorically stated that the appellant was registered for 'manufacturing of excisable goods' . It was further contended that Central Excise duty deposit of Rs. 17.39 lakhs was actually paid by the appellant and necessary details were furnished to the A.O. Once the Central Excise department has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be taken to be one of production (presuming that it does not constitute manufacture). Keeping in view the Supreme Court decision cited at 320 ITR 79 (supra) and in the case of India Cine Agencies v/s. CIT 308 ITR 98 (SC) and the decision of Authority for Advance Rulings (AAR) rendered in the case of Ramit Kumar Sharma (309 ITR 344), I am of the considered view that the activity of the appellant will be one of manufacture or production and accordingly qualifies for deduction u/s. 801C. 4. Another important consideration for the disallowance of the claim by the A.O was that most of the sales were made by the appellant to its sister concern namely M/s. Colourstar Dyes Chemicals at a rate which is much higher than the market rate. As seen from para 7 of the assessment order, A.O came to the conclusion that the arrangement between the appellant and its sister concern was of the nature referred to u/s. 80 IA(10) and that only net profit @ 6.89% can be considered to be eligible for deduction u/s. 80 1C and the balance is to be taxed as normal business income. However, the A.O went on to disallow the entire claim and the finding regarding applicability of section 80 IA(10) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.O's finding that the sister concern made purchases from the appellant at inflated prices does not stand to reason. It is further contended that the market price of any commodity depends on the quality of the product and since the appellant's product was of superior quality higher consideration was paid for the same. The very fact that the sister concern's G.P. has not gone down goes to prove that the sister concern in turn was able to sell the product at profit. 4.3 I have considered the observations of the A.O and the submissions of the appellant. The very fact that the G.P. of the sister concern remained consistent over the 3 assessment years, i.e., 2006-07, 2007-08 and 2008-09 belies the finding of the A.O that there was any arrangement between the appellant and the sister concern resulting in producing inflated profits to the appellant. Various reasons given by the appellant for earning the G.P @ 71.38 % and N.P. @ 70.42% are tenable. It is not proper to compare the profits of the appellant with the profits of units at Ahmedabad (which do not enjoy the tax concessions enjoyed by the appellant for having established the unit in notified area.). In this regard it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termed as a manufacturing activity so as to be eligible for deduction u/s 80IC. The Ld. D.R. further pointed out that the Gross profit shown by the Assessee was in excess of 70% of turnover which cannot be considered to be a normal profit. The Ld. D.R. also placed reliance on the decisions in the case CIT vs Tara Agencies (2007) 292 ITR 444 (SC), CIT vs Premier General Traders (P) Ltd (2000) 242 ITR 654 (Bom), Lucky Minmat (P) Ltd Vs CIT (2000) 245 ITR 830 (SC), Pravan Air Products (P) Ltd Vs JCIT (2012) 24 taxman.com 19 (Ahd) and other decisions. He thus strongly supported the order of AO. 8. On the other hand the Ld. A.R. reiterated the submissions made before AO and CIT(A) and further submitted that the Assessee is engaged in the manufacture of reactive dyes. The manufacturing process as carried out by the Assessee was that various crude raw materials which are in powder form are purchased on which diluent process is carried out by mixing crude dyes in the MS Ball Mill with Sodium Sulphate or Sodium Chloride which act as dispersing agents. Wherever required, Anti-dusting Oil is also used as a binding agent. The Ball Mill is rotated to ensure complete mixing and grinding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken in the end of Nov 2009 and the last dispatch of finished product was made on 30.11.2009 i.e. about 3 weeks prior to the visit of the IT Inspector and therefore the conclusion of the Inspector that no activity seems to be done at the factory premises since a long period was misplaced. The Ld. A.R. further submitted that on account of the chemical corrosion, the paint on the machine peeled off which does not mean that the machinery was laying in rusted condition. The Ld A.R. further submitted that the no statement of the Manager at the factory was recorded and if recorded, no copy of the same was made available to the Assessee which therefore was also against the principles of natural justice. He further placed reliance on the decision of Apex Court in the case of, Indian Cine Agencies vs CIT 308 ITR 98 (SC), CIT Vs Prabhudas Kishordas Tobacco Products (P) Ltd (2006) 282 ITR 568 (Guj), ITO vs Natural Fragrances (2012) 27 Taxmann.com 292 (Del)and Aquamall Water Solutions (P) Ltd Vs CIT (2013) 36 Taxmann.com 399 (Hyd). He further submitted that CIT(A) after considering the factual and legal position rightly held that the Assessee is entitled to deduction u/s 80IC. He also submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new and distinct object or article or thing with a different chemical composition or integral structures" 13. In the present case, though the assessment year involved is 2007-08. We are of the view that the definition of manufacture as defined in s. 2(29BA) though not applicable but certainly can be used as a guide. As per clause (b) of section 2 (29BA) the definition of "manufacture" means bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure . Before us, nothing has been brought on record to demonstrate that the chemical composition of the raw materials used by Assessee has undergone a change or there is a substantial change in the chemical composition or integral structure of the raw materials so as to form a new product and that the chemical composition of the finished product is different from that of the original raw material. As per the Assessee the nature of activity done by the Assessee at its unit is termed as manufacture by Excise Authorities. We are of the view that though under the Income tax Act there is nothing to suggest that if a particular process is considered as manufacturing p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether this is a manufacturing process or is an assembling process. The Apex Court in Oracle Software India Ltd. (supra) considering similar questions held that in each case when an issue of this nature arises for determination, the Department has to study the actual process undertaken by the assessee. If an operation/process rendered a commodity fit for use for which it would otherwise not be fit, the operation/process fell within the meaning of the word "manufacture". Therefore, in each case, where a issue of this nature arises for determination, the department should study the actual process undertaken by the assessee. In Emptee Poly-Yarn P. Ltd (supra), the Apex Court considering the similar issue held that repeatedly the Apex Court have recommended to the Department, be it under Excise Act, Customs Act or the Income-tax Act, to examine the process applicable to the product in question and not to go only by dictionary meanings. This recommendation is not being followed over the years. Even when the assessee gives an opinion on a given process, the Department does not submit any counter opinion wherever such counter opinion is possible. The Apex Court considering the issue in Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting an opinion of the experts, to decide that the product namely "Microprocessor based Fast Bus Transfer Scheme Panel" is a product by manufacturing or only an assembled item and thereafter, to decide the matter in accordance with law." 15. In the present case we find that CIT(A) has not obtained any report from an expert to conclude that the new product which has come into existence by undertaking the process of mixing and grinding is on account of manufacturing process but has accepted the contention of Assessee. Considering the aforesaid facts and relying on the decisions cited hereinabove, we are of the view that a definite finding is required to determine as to whether the activity of the assessee can be termed as manufacture in the light of the requirement of the Act so as to enable the Assessee to claim deduction u/s. 80IC. We are therefore of the view, that to meet the ends of justice, the above mentioned aspects needs to examined once again by CIT(A) in the light of the decisions cited above. We are further of the view that for deciding the issue as to whether due to the activity done by the Assessee, any change in chemical composition etc has taken place, CIT(A) may ..... 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