TMI Blog2011 (7) TMI 1273X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10BA and deleting the addition made by AO on account of belated deposit of employees contribution. 5. The ld. CIT (A) deleted the addition made by AO by allowing exemption under section 10BA at ₹ 29,97,074/-, at ₹ 99,02,240/- and ₹ 1,28,77,176/- respectively for all the years. The ld. CIT (A) deleted the disallowance of ₹ 15,049/- and ₹ 31,274/- made by AO on account of belated deposit of employees contribution respectively for assessment years 2004-05 and 05-06. No such ground is involved for assessment year 2006-07. Since facts are similar for all the three years, therefore, the facts involved in A.Y. 2004-05 will be discussed and the outcome of the same will be applicable for all the three years. 5.1. The ld. CIT (A) has also disposed off this ground for all the three years together. 6. On perusal of assessment order for all the three Assessment Years it is seen that the assessee has claimed 100% exemption u/s 10BA of I.T. Act and in this respect a detailed show cause letter was issued along with notices u/s 143(2) and 142(1) dated 27.11.2008 for all the 3 Assessment Years. The operating part of the show cause letter was reproduced in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded by ld. CIT (A) at pages 19 to 29 are again reproduced in the following manner :- The assessee The assessee has claimed deduction u/s 10BA in the Income Tax Return for the A.Y. 2004-05 and also qualifies for claiming this section. (Copy of Income Tax Return, Audited Balance Sheet, P L A/c, along with Audit Report for the A.Y. 2004-05 vide P.B. No. 87 to 107) As per section 10BA which has special provision in respect of export of eligible articles or things and as per act if any undertaking is claiming u/s 10A or 10B, they are not entitled to claim u/s 10BA, this section was inserted by Tax Law (Amendment 2003) w.e.f. 01.04.2004 with the condition that no deduction under this section shall be allowed to any undertaking for any A.Y. from beginning on 1st day of April 2010 Hence deduction in this section inserted by Taxation Laws (Amendment Act) 2003 w.e.f. 01.04.2004 to 01.04.2010 . As per section 10BA (2), the conditions which are the undertaking which is eligible for claiming the deduction are as follows: (a) it manufactures or produces the eligible articles or things without the use of imported raw material; Eligible article means all hand made articles or thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificate by District Industrial Center, Udyog Bhawan, Jaipur on dated 09.11.2005 (Copy of SSI registration is already enclosed for verification vide P.B. No.85) and the facts is also verified from the Sales Tax Registration No. w.e.f. 27.06.2003 (P.B .no 86)and Registration cum membership certificate from Export Promotion Council for Handicrafts, New Dehli.vide P.B. No. 84). Hence from all the documents it is aptly proved that the year of establishment of business is 2003. Therefore, the contention of the Ld. A.O. is wrong that the unit is formed by the splitting up or the reconstruction, of a business already in the existence. (c ) it is not formed by the transfer to a new business of Machinery or Plant previously used for any purpose. Since assessee has started a new undertaking as described in above point (b) and assessee purchased all new Plant Machinery for manufacturing process during the Assessment year 2004-05 assessee purchased all new Plant Machinery of ₹ 382154/-. The List of Plant Machinery and photocopy of bills already furnished to Ld. A.O. for verification (Copy of Bills vide P.B. No.125 to 138). The main machinery is hand tools, Grinder, Sandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges basis for doing various manufacturing activities through hand cutting, tools and done various manufacturing process such as sizing, shaping, grooving, making modification, finishing, polishing as per the distinct export orders quality. The assessee is a SSI unit and also registered as manufactured exporter in Sale Tax Department Export Promotion Council. (Copy of certificate enclosed vide page No. 84 to 86 for verification). To substantiate our claim as manufacturing concern we are reproducing land mark judgment and definition of manufacture:- Manufacture Explanation (iii) To Section 10A I.T. Act, 1961 (Prior to 1-4-2001) Explanation (iii) To Section 10B I.T. Act, 1961 (Prior to 1-4-2001) In the context of special provisions un respect of newly established industrial undertaking In free trade zones (s. 10A) and in respect of 100% export oriented undertakings (s. 10Bhe expression includes any (a) process, or (b) assembling, or (c) recording of programmes on any disc, tape, perforated media or other information device. EXPLANATION 1(iii) TO SECTION 10AA I.T.Act, 1961 (Inserted by section 27 read with Second Schedule to SEZA) In the context o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also assembling wooden legs and table tops etc, which is squarely covered as manufacture. Manufacture: When can be said to be on behalf of another Earlier the Supreme Court had in Shree Agencies v. S.K. Bhatacharjee Others 1977 ELT J 68 (SC) considered a somewhat similar question. IN this case, Shree agencies, a firm dealing in textile goods used to supply cotton yarn to several power loom units for conversion into fabric on job charge basis. Although, Shree Agency contended that yarn was sold to those power looms that it purchased fabrics back from them, the department could bring on records, documentary evidence of an apparent sale and purchase which were fabricated by the assessee. Accordingly, the Supreme Court concluded that it was Shree Agency and not the power loom units which should be regarded as manufacturer of fabrics. Manufacture [Sec.2 (f)] of Central Excise Act 1944 Manufacture include any processincidental or ancillary to the completion of the manufactured product; which is specified in relation to any good in, the section or chapter notes of the First Schedule to the Central Excise Tariff Act,1985 as amounting to manufacture( Deemed manufacture); or whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity . On this principle, It was held in the case of Kores India Ltd. Vs. CCE 2004 (174) ELT 7 (SC) by the Hon ble Supreme Court that the activity of cutting of Jumbo rolls into typewriter/ telex rolls was held to be manufacturing because the Jumbo rolls as such could not used as ribbons in typewriter. As physical characteristics of jumbo rolls and its shorter version in the form of typewriter and telex roll may have the same physical properties but on the basis of different use as a marketable commodity and after being cut, the same can not be used for the purpose for which it could be used in original shape, the same activity was held to be manufacture. In the continuance of the above aspect, it is pertinent to note that a number of processes and activities are required to be carried before the product is sold /exported. The various activities carried out by the appellant, are as under:- (i) Firstly, the appellant purchases wood, semi finished materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furniture were hand made articles of wood having artistic value. What the appellant did was the addition of wood and the artistic value and for this sole reason, the appellant was able to have a substantial amount of export turnover. It was also held In the Income Tax Appellate Tribunal Jaipur Bench A Jaipur Income Tax Officer vs. Goverdhan Prasad Singhal Jaipur vide ITA No. 964/JP/2007 for the A.Y. 2003-04, 200/JP/2008 for the A.Y. 2004-05 ITA No. 797/JP/2008 1000/JP/2008 for A.Y. 2005-06 that various activities carried out by the appellant and as mentioned hereinabove, the tribunal was satisfied that what the appellant purchased, ultimately resulted into an altogether different commodity being recognized by the commercial world i.e. the importer outside India, who were keen to import even at a much higher price than what the appellant incurred here. Admittedly, there has been a substantial value addition during such manufacturing processes carried on by the appellant. Hence the same is covered under the definition of manufacturing as defined by various acts mentioned above. Therefore, in the circumstances and facts of the case, it was held that the assessee has fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bajaj Tempo Ltd. V. CIT (1992) 196 ITR 188 (SC) (b) CIT v. Straboord Manufacturing Co. Ltd. (1989) 177 ITR 431 (SC) (c) Uddeereswara Mining Industries v. CIT (1993) 114 CTR (Karn 361); (d) CIT v. Mahani Oil Industries (P.) Ltd. (1992) 193 ITR 620 (Karn) (e) CBDT v. Aditya V. Birla (1988) 170 ITR 137 (SC); (f) CIT v. U.P. Cooperative Faderation Ltd. (1989) 176 ITR 435 (SC) Even it is held that more than one view is legally possible, the view which is favorable to the taxpayers must be adopted. Such a view is justified by the judgment of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) followed by Rajasthan High Court in various cases, such as the judgment in the case of CIT v. Multi Metals Ltd. (1991) 188 ITR 151 (Raj). In the judgment the Hon'ble court has also stated that it is now a well-settled principle of law that although the exemption provisions are to be construed strictly as regards the applicability thereof to the case of the assessee once it is found that the same is applicable, the same are required to be interpreted liberally . Reference to Tata Iron Steel Co. Ltd. v. State of Jharkhand (2005) 4 RC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s justifiable, hence total direct expenses towards manufacturing as a whole is more than 0.36%. 1.2.3 As we have also mentioned in para no. 1.2.1 that first 3 bills were of trading activity before the commencement of manufacturing activities and thereafter manufacturing commenced on 05.11.2003, after that manufacturing, first sale was made on 14.11.2003, Hence the first purchases of polish material was on 31. 10.2003of ₹ 390/- is correct next purchases was ₹ 1290/- on 03.11.2003 is also correct. During the year total Polish Expenses is ₹ 245109/- but there was other Polish material which was purchased against Form D of ₹ 3,08,898 as per list enclosed which was shown in the head Purchase D form, hence total purchase of Polish material is ₹ 5,54,007 which is 1.90% of the total sale that is proportionally of sales and justified. (List of Polish material under the head Purchases form D is enclosed vide P.B. no. 140 to 141) The Ld. A.O. has mentioned that hardware items were purchased on dated 26.03.2004 of ₹ 2895/-with a low amount, which is not correct. The assessee was regularly purchasing hardware consumable items which were included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work, hardware, packing material metal are used in the process. Hence good are not exported as such but lot of production process is carried out in the factory of the assessee with the help of hand tools and machinery so that all hand made articles or things which are of artistic value and which requires use of wood as main raw material are ultimately exported. The convertible forex is received with in the time prescribed by RBI through Banks, Hence Rule 23 (1) (b) of RST Act. which prescribed form no 17B is just like the explanation of clause (d) of the section 10BA which insisted export out of territory of India through customs clearance . The each every export of the assessee goes out of the territory of the India through custom clearance as per the copy of sales bills is already submitted before the Ld. A.O. As it is Judicially held by Hon ble Income Tax Appellate Tribunal, Jaipur Bench, Jaipur in the case of Shri Goverdhan Prasad Singhal Vs. The I.T.O. Ward 6 (1), Jaipur vide ITA No. 964/JP/2007 for the A.Y. 2003-04, 200/JP/2008 for the A.Y. 2004-05 ITA No. 797/JP/2008 1000/JP/2008 for A.Y. 2005-06 (which is similar to our case) that only on the basis of purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other countries like China, Thailand, Malaysia and artistic accuracy, sizing, polishing, strict quality control is required to achieve export turnover in the competitive world, hence the assessee used hand tools and machineries to increase the further artistic value of the semi finished product made of the wood. The government of India is also considering this activity under the Export Promotion Council for Handicraft (as per certificate enclosed sponsored by Ministry of Textiles, Government of India on dated 17.12.2004 vide P.B. No. 84). In view of this since export is done as per the different type of design and various distinct export orders. Hence it can not be said that the assessee is primarily dealing in readymade furniture. The assessee has done some activities outside the factory premises and the reasons for justifying this fact are as follows: 1. No Seasoning Plant can be installed:- The manufacturing unit is situated in no pollution zone, due to this, the assessee can not install the seasoning plant in that area, which is a initial and basic process of manufacturing. So process is done from outside. 2. No permission for specific machinery (aara machine):- The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsumables store etc. to achieve the desire export and this is the first year of the operation of the firm and the unit employed more than 20 workers during the previous year in the process of manufacturing as per section 10BA (2) (e) of I.T. Act 1961. Hence wages expenses are justified. 1.5 There are always job worker employed through labour contractor also remain in the factory as they have to do artistic work. They also take part in the production process always remain in the factory premises so that the desired export quality can be produced. During the year total job work charges of ₹ 4,68,905/- (Details of which is already given to the Ld. A.O. vide point no. 8 of our reply submitted on 18.11.2008 herewith enclosed vide P.B. No. 108). Hence job work expenses are justified. 1.6 Survey u/s 133A of the Income Tax Act 1961 was conducted of the assessee at the factory premises and no adverse finding was found by the then Addl. Commissioner of Income Tax, Hence no physical inventory was taken at the factory and no advance tax (cheque) was demanded from the assessee during the survey proceeding. Only statements were recorded of the Mr. Rama Kant Johri, which were st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore the expenditure incurred of negligible share out of manufacturing cost and satisfied that the appellant was engaged in the manufacturing and production of eligible articles under the provisions of section 10BA of the Income Tax Act, 1961 It is pertinent to note that all Pant Machinery are very few, they are just, hand cutter, grinder, drill machine, sanding machine, router machine, hammer and various hand tool. All these machineries are used by hand only and used for cutting, shaping, finishing the wood and manufactured only through the uses of the machinery. Hence product manufactured by the use of these machineries are hand made and they are not only machinery manufactured. Hence the deduction claimed u/s 10BA by the assessee is correct. 1.7 The contention of the Ld. A.O. is that the assessee has purchased semi finished goods from The Art Palace who manufactured articles with the help of power machine but the order is given by the assessee as per specific order of the foreign buyers with specific type, size, design, specific number. The raw material required to fulfill the order is purchased and procured in semi finished form as per the size, design, type ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... List of Plant Machinery and photocopy of bills furnished herewith vide P.B. No. 125 to 138 ) The main machinery is hand tools, Grinder, Sanding Machine Drill Machine required for wooden handicraft artistic work. 4. As mentioned in section 10BA of The Income Tax Act 1961, ninety percent or more of its sale during the relevant year should be by way of exports of the eligible articles or things. During the year also the assessee has exported 99.40% sale out of total turnover by way of eligible articles or things. Hence keeping the same in mind, the above said condition of sec. 10BA of The Income Tax Act 1961 is fulfilled by the assessee. 5. Total own workers during the relevant year were around 30. However total workers employed through contractor to whom job charges paid were around 150 during the year. Labour wages register of own labour is already presented to Ld. A.O.(letter dated 17.11.2008 vide point no. 1 produced on dated 18.11.2008. vide page No. 108 to 124) Hence the condition of section 10BA of the Income Tax Act 1961 are fulfilled by the assessee in this case. The only assessee is claiming benefit of the Section 10 BA and no vender or supplier is taking dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iles amounts to manufacture of thing or article. Marbles Blocks as a mineral produced from the earth by itself is not usable for any purpose, therefore, to make it usable, various processes which could be applied to bring it to that stage, would amount to manufacturing/ production. Hence the contention of the Ld. A.O. as mentioned in the case of Lucky Minmat Pvt. Ltd. vide ITA No. 245 ITR 830 that the activities carried out by the assessee in the instant case does not tantamount to manufacturing. The only argument before the Supreme Court in the case of Lucky Minmat Pvt. Ltd vide ITA No. 245 ITR 830 was that the High Court Judgement in the case of Best Chemical has wrongly been distinguished that contention has been rejected by the Supreme Court. The Supreme Court is not examining issue about the fact in above mentioned case whether the business of mining of lime stone and marble blocks, thereafter cutting and sizing the same before it is sold in the market is manufacturing or production, as the case may be. Apparently in the earlier decision of the Supreme Court in Chowgle and Co. (P) Ltd. V. Union of India Ors. (1981) 47 STC 124 (SC) in which the activity of mining held to res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in hand after undergoing one or more activities one or more, must reach to a point where it can no longer be regarded as the original commodity but recognized as a new and distinct article. As it was held in the case of AO v/s M/s World Wide Stones, Kota (2008) 115 TTJ 613 (JP), wherein the case of Sand Stone converted into tiles and slats, was treated as manufacturing/production. The Ld. A.O. has referred another case Union of India v. Delhi Cloth and general Mills [1997] ELT (J) 199 and South Bihar Sugar Mills V. Union of India [1978] ELT (J) 3 where it was observed that manufacture implies a change, every change of an article is the result of treatment, labour, or manipulation in order to make a change amount to manufacture . Something more is necessary and that something more is such transformation of a production as brings into existence a new and different article having distinct name, character or use. But in our case the assessee s production after so much value addition transformation is altogether a new artistic handicraft item with distinct character use. It is obvious thing that manufacture process is carried out as a result of labour, treatment or manipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above, the very first step is to assemble the same, if so required. Some time the semi finished furniture is required to be given further shape as per the desired exportable designs. thereafter, punching is done by hammering nails by hand. It is pure labour work which can be done by experts only. It may be noted that the nails are of special type having artistic and antique look. fitting of brass and iron items again with a view to give artistic and antique look, Filing with a view to smoothen the surface, Sanding, Carving with a view to bring the artistic value and to show that these are antique items, And lastly polishing, Thereafter, various wooden items are fitted according to the need and design of the exportable wooden article, i.e. wooden moulding is fitted Inlay is done. Hence the final product emerged with a distinct character or use. Therefore the facts on which the above cases cited by the Ld. A.O. are rather in favour of the assessee and assessee carried out the all steps for being manufacture the eligible article or thing which comes into the ambit of manufacture for claiming the deduction of section 10BA of the Income Tax Act, 1961. Therefore, in assessee s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnished which were some affidavits hardly have any bearing upon the issue of disallowance of exemption claimed under section 10BA and the assessee has not cited any reasons which prevented her from furnishing the evidence at the assessment stage and in this manner he has objected the admission of additional evidence. Thereafter, after considering the remand report, the AO was again requested to furnish that whether only finished goods have been purchased or only skeleton has been purchased for manufacturing handmade articles or things which are of artistic value for which copies of affidavits furnished by different persons were sent to him. Since no such enquiry was carried out by the AO as directed, therefore, he was again requested to make necessary enquiry and to send the report after giving opportunity to the assessee. In the meanwhile counter comments were also filed on behalf of the assessee which were also sent to the AO for his comments. Thereafter, the AO recorded the statementsof12 persons and vide his report dated 21.5.2010 forwarded by additional CIT Jaipur vide letter dated 28.5.2010 which was received in the Office of ld. CIT (A). Copies of the same were given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer as well as of various contractors who has done job work for the appellant it is noticed that they have confirmed to have supplied not the readymade material but furniture in skelton conditions as per specific order received from the appellant. The various contractors have also confirmed that they have done artistic hand work on such furniture as per direction of the appellant. Even the assessing officer in his report dated 21.5.2010 has reported that the various persons were receiving written / oral orders from the appellant and as desired by the appellant requisite designing and carving work was carried out by them for which in most of the cases the payment was received by account payee cheque / draft. The AO had also reported in the said report dated 21.5.2010 that most of the persons are assessed to tax, having PAN and the statement given is in agreement with books of accounts and return of income furnished by them. From these statements it is clear that whatever items were purchased by the appellant after carrying out certain work it resulted into a different commodity being recognized by the commercial world i.e. the importer outside India and from the point of view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. With this discussion the relevant ground of appeal for all the 3 A.Yrs. is hereby allowed. 9. Now the department is in appeal here before the Tribunal for all the three years. 10. The ld. CIT D/R who appeared before the Tribunal firstly supported the order of AO as well as the remand report sent by the AO. It was further submitted that assessee is doing some work of processing only and thereafter the same is sold out in the same shape. No substantial activity of manufacturing has been done by the assessee as only 1% of labour expenses has been shown by assessee on all the manufacturing activity done by him. Therefore, it is amply proved that assessee is not a manufacturer. Therefore, the exemption under section 10BA was rightly disallowed by the AO. Some portions of the order of AO as well as remand report was read by ld. CIT D/R. 11. On the other hand, ld. Counsel of the assessee strongly placed reliance on the order of ld. CIT (A). It was further submitted that it was incorrect that assessee has shown only 1% of labour expenses. 1% expenses incurred on labour is only on those labour from whom the work was got done from outside labourers. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions placed on record along with the submissions of ld. CIT D/R. After considering the submissions and perusing all other materials, we find that ld. CIT (A) was justified in holding that assessee is eligible for deduction claimed under section 10BA of the Act for all the three years. Facts and submissions have been discussed by ld. CIT (A) in detail. The objection of the AO raised in his assessment order as well as in his remand report were also taken into consideration by ld. CIT (A) and thereafter ld. CIT (A) has arrived at the conclusion that assessee is not merely a processor but has done substantial activity of manufacturing the handicraft goods and, therefore, the assessee is entitled for deduction under section 10BA of the Act. The main plank of argument of ld. CIT D/R is that assessee is simply a processor as he has incurred only 1% of the total turnover as labour expenses. This is not correct. 1% labour expenses are incurred on private labourer engaged by the assessee on job work got done by the assessee, otherwise the assessee has its own manufacturing premises where permanent employees are employed and if this expenditure is taken into consideration then it is not 1% b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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