TMI Blog2016 (11) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... time allowed by the notice issued u/s 148 but clause (b) is applicable only in case where the assessee has not furnished the return. In the case of the assessee, the assessee has furnished the return u/s 139(1) therefore, it is only clause (a) of section 124(3) which is applicable. Clause (a) of section 124(3) does not refer to notice issued u/s 148 of the Act. Therefore, we do not find any illegality or infirmity in the order of CIT(A) which warrants our interference so far it relates to ground taken by the Revenue in respect of the provision of section 124(3)(a) of the Act is concerned. We also noted that the CIT(A) has annulled the assessment not only on the basis of jurisdiction but has also annulled the reassessment on the basis of provision of section 151 as in his opinion, the Assessing Officer has not taken approval in accordance with the provisions of section 151(2) before issue of notice u/s 148 of the Act.The Revenue has not come in appeal against the aforesaid finding of CIT(A). - Decided against revenue Claim of the assessee u/s 80IC - Held that:- The assessee is engaged in manufacturing and production of an article and therefore, the assessee shall be entitled for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t do not provide for any time limit for questioning the jurisdiction in respect of the notice issued u/s 148 of the Act. This section provides time limit only for challenging the notice u/s 142(1) or 143(2) of the Act. In the case of the assessee, the notice u/s 148 was issued by the Income Tax Officer-1(2), Lucknow who was not having the jurisdiction over the assessee. The jurisdiction in the case of the assessee lies with Dy.C.I.T., Range-4, Lucknow who has completed the assessment proceedings u/s 147 read with section 143(3) of the Act. In this regard, our attention was drawn towards the provision of section 120(1), 120(2) of the Act as well as the definition of the Assessing Officer given under section 2(7A) of the Act. 3. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below. We have also gone through the provisions of section 121, 122, section 2 sub section (7) which defines the jurisdiction of Assessing Officer as well as the provisions of section 124(3) of the Act. In our opinion, we have not to look into the question, on the basis of the ground of appeal taken by the Revenue, with which Assessing Officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdiction of the Assessing Officer to issue notice u/s 143(2) and 142(1) of the Act. If we look into the said clause (b) of section 124(3), we noted that this clause talks of challenge of jurisdiction not after the expiry of the time allowed by the notice issued u/s 148 but clause (b) is applicable only in case where the assessee has not furnished the return. In the case of the assessee, the assessee has furnished the return u/s 139(1) therefore, it is only clause (a) of section 124(3) which is applicable. Clause (a) of section 124(3) does not refer to notice issued u/s 148 of the Act. Therefore, we do not find any illegality or infirmity in the order of CIT(A) which warrants our interference so far it relates to ground taken by the Revenue in respect of the provision of section 124(3)(a) of the Act is concerned. We also noted that the CIT(A) has annulled the assessment not only on the basis of jurisdiction but has also annulled the reassessment on the basis of provision of section 151 as in his opinion, the Assessing Officer has not taken approval in accordance with the provisions of section 151(2) before issue of notice u/s 148 of the Act. The relevant findings of CIT(A) are repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he residential and business premises, the statement of the employee of the assessee was recorded. The Assessing Officer, on the basis of the statement, took the view that the assessee was not doing any manufacturing or processing activity. It was only mixing and repacking various ingredients and selling these in the market. The Assessing Officer was not convinced with the reply of the assessee therefore, he took the view that the assessee has not complied with primary condition as given u/s 80IC of being engaged in manufacturing or processing. The Assessing Officer therefore, disallowed the claim u/s 80IC of the Act. The assessee went in appeal before the CIT(A) who examined the manufacturing process and the relevant evidence and came to conclusion that the assessee is engaged in manufacturing process whereas finished product is distinct from raw material and allowed the deduction to the assessee u/s 80IC by holding as under: 6(5) The appellant's case can therefore be examined in light of the above judicial pronouncements to see whether the activity carried out by the appellant comes under the expression manufacture so as to be eligible for claim of deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done at controlled temperatures to get the desired chemical reaction. The finished goods are themselves a result of Chemical reactions only. Several raw materials used by the appellant are hazardous chemicals, which are not per se fit for human consumption or application. However scientifically derived formulations, whereby other chemicals and substances are mixed with such material, such that the hazardous properties are removed are used by the appellant. Several natural oils and flavours, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various types of industries and applications. Mixing cannot be done without proper lab testing techniques and without studying the behavioral pattern of various blends over a period of time, which may range from one hour to 15 days. The blended mixtures' properties change as some chemicals react over a period of time, while in some cases reactions are instant. Testing is done at each stage, by again reacting the finished products with other chemicals and substances, at various tem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below as well as the documents placed before us. The only question before us is whether the assessee is engaged in manufacturing activities to be eligible for deduction u/s 80IC of the Act. The provision of section 80IC although lays down various conditions to be complied with by an undertaking to be eligible for deduction u/s 80IC(3) of the Act but the Revenue did not raise any objection in this regard except that the assessee is not engaged in manufacturing or production of an article. Learned D. R. even though vehemently relied on the order of the Assessing Officer but did not deny that the assessee has not failed to comply with other conditions as stipulated u/s 80IC of the Act for the purpose of being eligible for deduction 80IC of the Act. His main thrust of the argument was that the assessee was not engaged in manufacturing or production of an article. He was simply mixing the various chemicals and on that basis he was claiming as if he is engaged in manufacturing or production of an article. 5.1 On the other hand, the Learned counsel for the assessee vehemently relying on the order of the CIT(A) contended before us that the assessee is very much engaged in manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Several natural oils and flavors, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various type of industries and applications. Mixing cannot be done without proper lab testing techniques and without studying the behavioral pattern of various blends over a period of time, which may range from one hour to 15 days. The blended mixtures properties change as some chemicals react over a period of time, while in some cases reactions are instant. It was further submitted that the testing is done at each stage by again reacting the finished products with other chemicals and substances, at various temperatures depending on the intended use of the finished product. Thus, it was expressed that the industry requires high expertise, specialization and knowledge of organic as well as inorganic chemistry. It was submitted that all the finished goods are totally distinct, as is evident from the price list and all the raw materials are also totally different. 5.2 The assessee has also pointed out that the assessee is paying VAT depending on the item products an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e induction and glass jars. The assessee first demonstrated how the sweet gulab is manufactured. The chemical engineer showed us 15 items out of which two were in solid form while 13 were in liquid form. He pointed out that the items brought by him for manufacturing 100 gms of sweet gulab were as under: 1. Aldehyde C 11 Undecylic 0.1 2. Aldehyde C 8 0.02 3. Aldehyde C 9 0.05 4. Benzophenone 10 5. Cis-3-Hexanol 0.05 6. Cis-3-Hexanyl Acetate 0.08 7. Citral 0.5 8. Citronellol 15 9. Damascone Beta 0.04 10. Geraniol 12 11. Geranium Chinese 4 12. Linalool 0.8 13. Phenyl Ethyl Alcohol 47 14. Rose Crystals 10 15. Rose Oxide Indian 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the raw material. It has resulted in the transformation of the object or the article which is entirely new and distinct having a different name, character and use. We noted that the provision of section 80IC was inserted in the statute by the Finance Act, 2003 with effect from 2004. Section 80IC nowhere defines the word manufacture or production of an article. We noted that the word manufacture or production of an article or thing has also been used u/s 80IA as well as u/s 10B of the Act. Section 10B defined the word manufacture for the purpose of the said section to include any (a) process or (b) assembling or (c) recording of programme on disc, tape, perforated media or other information storage device. Thus, 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 clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Special Economic Zone Act, 2005. 5.10 As per the said definition process is included in manufacture. Subsequently, by the Finance Act, 2009 w.e.f 1.4.2009, clause (29BA) was inserted in section 2 of the Income Tax Act, 1961defining the expression manufacture as under: manufacture , with its grammatical variations, means a change in a non-living physical object or article or thing,- (a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or (b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 5.11 In Chowgule Co. Pvt. Ltd. Vs. Union of India (1981) 1 SCC 653 Hon ble Supreme Court, after considering the judgment of Hon ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay (1959) 10 STC 500 (Bom.), clearly observed on the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted manufacture or processing or ore for sale within the meaning of section 8(3)(b) and Rule 13 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al composition demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical composition, because what is produced by such blending is ore of a different chemical and physical compositions. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to processing of ore within the meaning of Section 8(3)(b) and Rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities for such ore on the conveyor belt of the mechanical ore handling plant, but to our mind it is immaterial as to how the blending is done and what process is utilized for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are entirely different. In our opinion, in view of this clause and the decision of Hon'ble Supreme Court in the case of Chowgule Co. (supra), it cannot be held that the assessee is engaged in these units in manufacturing. 5.13 Further, in CIT Vs N.C. Budharaja Co. (1993) 204 ITR 412 (SC), Hon ble Supreme Court further observed that the word production is much wider than the word manufacture . It was said (page 423): The word production has a wide connotation than the word manufacture . While every manufacture can be characterized as production, every production need not amount to manufacture The word production or produce when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. 5.14 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon ble Supreme Court defined the word production , albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educt from their turnover under Section 8(a), the value of the tea purchased by them. The High Court of Bombay held that different brands of tea purchased by the assesses could not be regarded as processed within the meaning of the proviso to clause (a) of Section 8, because there was not even application of mechanical force so as to subject the commodity to a process, manufacture, development or preparation and the commodity remained in the same condition. The argument of the Revenue before us was that this decision of the Bombay High Court was on all fours with the present case and if the blending of different brands of tea for the purpose of producing a tea mixture in accordance with a formula evolved by the assesses could not be regarded as processing of tea, equally on a parity of reasoning, blending of ore of different chemical and physical compositions could not be held to constitute processing of the ore. Now undoubtedly there is a close analogy between the facts of Nilgiri Tea Company case [10 STC 500 (Bom HC)] and the facts of the present case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Tea Company case [10 STC 500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because these brands of tea experienced, as a result of mixing, a qualitative change, in that the tea mixture which came into existence was of a different quality and flavor than the different brands of the tea which went into the mixture; (ii) There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the assessee, since, in the present case, the blending was done by application of mechanical force, but that is not the correct test to be applied for the purpose of determining whether the operation constitutes is processing . (iii) The question is not whether there is any 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 . 5.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending of tea does not amount to manufacture or production of an article or thing, but is only processing. Hon ble High Court allowing the appeal of the assessee held 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 recognized 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 units of the assessee s 100% EOU, it would defeat the very object of section 10B of the Act. (similar to assessee s case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon ble High Court held as under: The finding of this court is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export processing zones, free trade zones and to 100 per cent export oriented units covered by sections 10A, 10AA and 10B of the Income- tax Act. Therefore, following the judgment of this court above referred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant s entitlement for exemption. 5.20 Hon ble high court in this case, in our opinion, has clearly laid down that once the assessee is recognized as a 100% EOU for engaging in an activity and assessee is engaged in the same very activity, if the exemption is denied to the assessee on the ground that there is no production or manufacturing but only processing of the products exported in the 100% export oriented unit, the same would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claimed exemption u/s 10B of the Act in respect of its 100% EOU for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The AO rejected the claim of assessee of exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:- 32. The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression Existing Special Economic Zone to mean every Special Eco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flavour tea , green tea instant tea , packet tea quick brewing black tea , tea and test bag have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions manufacturer , Buyer , Packet Tea , Tea Bag ,- Green Tea , Quick Brewing Black Tea , Instant Tea and Made Tea have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression manufacture as under: manufacture , with its grammatical variations, means a change in a non-living physical object or article or thing, - (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; The aforesaid definition of the expression manufacture , although brought into the statute book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Distribution Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above. 35. We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture which included 'processing' contained in section 1OB of the Act was deleted w.e.f. 01.04.2001. The argument of the department is that manufacture or product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `manufacture under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act. 37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s.10B of the Act. Further, assessees who are in the business of blending and processing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise. From this judgment, thus, it is apparent that the Hon ble Apex Court accepted that manufacture/production includes processing also. 5.26 We have also gone through the decision of Hon ble Supreme Court in the case of ITO Vs. Arihant Tiles and Marbles Pvt. Ltd. 320 ITR 79(sc). In this case when the assessee was engaged in the activity of cutting and polishing of marble blocks, the question before the Supreme Court was whether the activities undertaken by the assessee would fall within the meaning of the words manufacture or production in section 80-IA of the Income-tax Act, 1961? In this case, Hon ble Supreme Court, after discussing the definition of manufacture given in section 2(29BA) of the Income-tax Act, 1961 and also discussing the provisions of section 80- IA(2)(iii) and after going through various decisions, held as under: 22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does ..... X X X X Extracts X X X X X X X X Extracts X X X X
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