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2018 (3) TMI 520

trate that the commodity which was subjected to the process of manufacture could be identified as a different character in name as well as in use i.e; a distinct commodity had come into creation as a result of his manufacturing activity. - Held that:- Apex court in the case of CIT-V versus Oracle software India Ltd (2010 (1) TMI 9 - SUPREME COURT OF INDIA) wherein the duplicacy process was considered to have changed the basic character of a blank CD which thus became dedicated to a specific use. - In the facts of the present case the specific steps processes have been identified the employees are available a partner of the assessee firm having a technical qualification is available on record the product being manufacture/produce admittedly does not use heavy electricity or heavy machinery similarly does not require highly literate, technically qualified staff the fact that the individual parts on going through the process of manufacture result in production of products which are separate and distinct from the sum total of the purchased parts which are identified as separate products in the market having separate and distinct identity from its individual parts. The claim ha .....

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of manufacturing activities set out in pages 4 and 5 of the assessment order were provided. The AO was of the view that the assessee needed to demonstrate that the commodity which was subjected to the process of manufacture could be identified as a different character in name as well as in use i.e; a distinct commodity had come into creation as a result of his manufacturing activity. Reliance was placed upon the decision of Hon ble Supreme Court in case of Dy. CST vs. Pio Food Packers, (1980) 46 STC 63. 2.1 Accordingly for the reasons set out in para 6 and 6.1 the AO allowed the deduction for the manufacturing of laptops and mouse and rejected the claim of manufacture / production of External DVD Writer and External DVD. 2.2 The assessee carried the issue in appeal before the CIT(A) who considering the submissions advanced concluded that infact there was no manufacturer of any product. He noted that the manufacturing expenses, salary expenses etc. debited in the profit & loss account were negligible. There was no machinery to carry on the manufacturing process. The assessee was accordingly required to justify its claims. After hearing the assessee he held that the AO was justif .....

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to the synopsis filed it was submitted that the assessee firm had started the business of manufacturing/production of computer laptops including peripherals like computer mouse external DVD writer and external hard disks in 2010-11 assessment year. Accordingly it was his submission that 2010-11 AY was the first year of operation wherein the declared turnover from the Manufacturer of these 4 products was ₹ 39,08,250/- on which the eligible profit was ₹ 5,68, 860/-. After audit of the books of account and filing of the audit report duly certified by a chartered accountant and filing of form No. 10 the deduction under section 80 IC was claimed by way of a return filed on 14/10/2010 to the tune of ₹ 5,51,763/- declaring a total income of ₹ 17,100/- the said return was duly processed under section 143 ( 1) and has attained finality. 3.2 Similarly in 2011 - 12 assessment year carrying out the very same activity the assessee declared a turnover of ₹ 3,00,30,984/- on which a profit of ₹ 92,42,715/- was declared. The claim of 80 IC deduction it was submitted was similarly supported by audit report duly certified by a chartered accountant after getting th .....

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n an incorrect appreciation of facts. Inviting attention to the assessment order it was submitted that the entire process has been explained by the assessee before the assessing officer qua the 4 products. Considering this qua the 2 products deduction under section 80 IC has been granted by the AO himself and qua 2 products the assessing officer has denied the relief. Referring to this it was submitted the process of manufacture admittedly is available on record and has been elaborated and discussed in the detailed assessment order itself on record which apparently the Ld. CIT-A while withdrawing the relief granted failed to even consider or refer to in his order. The specific flowchart it was submitted is available at pages 2 to 4 of the assessment order and is available in the Paper Book filed before the AO as well as the CIT(A). Referring to the same it was submitted each of the steps have been elaborately discussed. Thus it was argued that on this incorrect appreciation of facts itself the claim of the assessee deserves to be allowed. Apart from that it was submitted that even before the CIT(A) the said explanation is offered by the assessee as would be evident from para-6.1.2 .....

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ed to be an external USB DVD unless and until they are assembled, fitted, made functional, and made fit for use by attaching wire, cased/housed and screwed thus made fit to be used. 3.5 Similarly for the product identified as External DVD Writer the necessary parts would remain the same as above except the specific programming would necessarily be different and more complex. The two products are separate and distinct from each other and also their independent parts. 3.6 Similarly Computer laptop and a computer mouse are bought and sold as separate and independent products from the sum total of their individual parts. Having different functions and have separate identity from the individual items purchased which are assembled together. Attention was invited to pages 7 and 8 of the synopsis. Taking as an example simpler of the two products as an illustration it was submitted that a computer mouse may appear to be a simple item but for manufacturing/producing the same following separate items need to be purchased which are separately identified and individually cannot be considered to b a computer mouse as a products. The individual parts are purchased and used all : 1) mouse PCB whic .....

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al/USB Hard Disk) Raw materials/components Sl. No. Broad component Parts name 1. Casing includes (a) Housing/casing/cover A (Upper plastic cover) (b) Housing/casing/cover B (Lower plastic cover) (c) Front bezel (Front plastic cover) 2. USB Port includes - PCBA/Computer circuit board with USB port 3. USB cables includes (a) USB cable (b) Connecting wire 4. Drive includes - Hard disk drive 5. Screws 6. Branding stickers/labels Final product External /USB Hard Disk Characteristics/products Product 03 (Computer laptop) Raw materials/components Sl. No. Broad component Parts name 1. Barebone notebook includes (a) Trackpad, LCD screen, keyboard, etc. (b) CPU Processor 2. Memory includes - Memory module 3. Hard disc drive - Hard disc drive Characteristics/products Product 04 (Computer mouse) Raw materials/components Sl. No. Broad component Parts name 1. Mouse PCB includes (a) PCB (b) IR Sensor 2. Mouse plastic parts includes (a) Housing/casing/cover A (Upper plastic cover) (b) Housing/casing/cover B Now it can been clearly seen that the components and inoputs purchased for each of the item lose their identity after the processing / assembly is done by the assessee firm for each of the prod .....

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the exposed mechanical components used. It loses the characteristics of its components and becomes an item of independent use as a plug & play mouse -The shape and look of the final product is completely different from the exposed mechanical components used. Use Used to work with different machines within short intervals of time, with ease of plug and play features. Used to take backup of different computers/servers within short intervals of time, with ease of plug Et play features. None of the components can act as a laptop without the aforesaid assembly process on its own. None of the components can act as a mouse without the aforesaid assembly process on its own. Marketability/commercial viability It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specificall .....

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e was any doubt regarding the manufacturing process, this fact should have been brought on record by the Ld. AO though a finding of fact / enquiry in this regard, especially when the Ld. AO had all judicial powers of enquiry at his disposal under the Act, in this regard. Reliance in this regard is also placed on the judgment of the Hon'ble Supreme Court in the case of S.A. Builders vs CITas reported in 288 ITR page 1. in which, it has been held that the Assessing Officer cannot sit in the arm chair of a business man to decide the issues relating to the business expediency. Therefore, once the books of the assessee firm have been accepted beyond doubt, there remains no question on the lack of certain levels of plant and machinery / expenses as assumed to be apt by the Ld. AO. ii. Infact, since the assessee firm had been carrying on the said business for two previous assessment years, the staff of the assessee firm had become autonomous for the said production activities using the toolkits/ equipments& computer for testing & soldering and did not require immediate supervision from the partners in this regard and, therefore, the partners could be stationed in Delhi, taking .....

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ay of giving them exemptions from payment of excise duty, in which most of the components even till date are imported from outside the country for the want of specialized machinery and research St development in this regard. Infact, the assembling activities cannot be considered out of the definition of manufacture by any stretch of imagination and therefore such a disallowance is not called for in the case of the assessee. Reliance in this regard is placed on the following judgments of various High courts and Tribunals, wherein it has been held that Assembly clearly amounts to manufacture, in the cases of: ✓ CIT vs. MAHESH CHANDRA SHARMA (2009) 308 ITR 0222 (PaH HC)ar page 33 of the Judgment Set "Deduction under s. 80-IB-Manufacture or production-Assembly of motorcycle wheel- Motorcycle wheel assembled by assessee by using rim, tube, tyre, bearing, drum, spoke, nipple and collar resulted in an article distinct in name, character and use hence 'manufacture' eligible for deduction under s. 80-1B-Finding arrived at by Tribunal is a finding of fact not giving rise to any substantial question of law" CIT vs. JACKSON ENGINEERS LTD. (2012) 341 ITR 0518 (DEL HC) C .....

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before us, where the assessee was carrying on one of the activities of manufacturing process, which itself is manufacturing and merely because the assessee was not carrying on the other activities envisaged by the Assessing Officer, does not disentitle the assessee from the claim of deduction u/s 80IC of the Act. The activities being carried out by the assessee for the manufacturing of transceiver set and power supply equipment makes the product marketable for its ultimate use by the government agencies to whom supplies are being made by the assessee, entitles the assessee to the claim of the deduction u/s 80IC of the Act. We confirm the order of the CIT(A) in this regard. 3.10 Reliance was further placed upon the following decisions so as to argue that the process undertaken by the assessee amounts to manufacture : a) India Cine Agencies: Computer Graphics Ltd. Vs. CIT, (2009) 308 ITR 98 (SC) b) Vijay Ship Breaking Corporation & Others Vs. CIT (2009) 314 ITR 309 (SC) c) CIT Vs. M/s Oracle Software India Ltd. (2010) 320 ITR 546 (SC) 3.11 The decision relied upon by the CIT-A in the case of M/s Indican Software Vs. ITO it was submitted is clearly distinguishable on facts. The i .....

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y checking. Branding/ Labelling, Packing & Cleaning etc. ; are steps common to any trading activity, it is submitted in this regard that the Branding/ labeling activity has been specifically observed to be covered under the definition of Production and thus where Branding/ labeling is only one of the many activities undertaken by the assessee firm in relation to the production of the impugned goods, the said processes cannot be considered to be outside the purview of production (manufacturing) by any stretch of imagination and thus the disallowance of deduction made in case of the assessee firm deserves to be deleted. 3.13 Accordingly it was his submission that infact it is clearly a case of change of opinion on same set of facts by the AO and the CIT(A) as no fresh material has been taken on record to vary the conclusions. The past history of the assessee itself has been ignored on an arbitrary reasoning contrary to settled legal principles. The facts in assessee s own case it was submitted have been ignored. Accordingly it was his submission that the necessary relief in accordance with law may be granted to the assessee 4. The Ld. Sr. DR Mr. Manjeet Singh reading through the .....

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7. Inspection. 8. Assembly of drives in casing. 9. Testing the read operation of the drive for CD. 10. Write operation on the CD. 11. Read operation of DVD. 12. Write operation of DVD. 13. Branding. 14. Testing of Software compatibility. 15. Final testing. 16. Final inspection. 17. MRP sticker and labeling. 18. Cleaning and packaging. 19. Shipping to customer. Manufacturing process laptops 1. Physical inspection of barebone computer on receipt from supplier. 2. Physical inspection of Hard Disk Drive on receipt from supplier. 3. Physical inspection of Memory on receipt from supplier. 4. Serial Nos. of all the components. 5. Testing of barebone computer. 6. Testing of Hard Disk Drives. 7. Testing of Memory. 8. Installation of Memory inside the barebone computer. 9. Installation of Hard Disk Drive inside the barebone computer. 10. Loading of operating systems/required softwares. 11. Testing of printer and other devices on the computer. 12. Testing of all the ports. 13. Branding. 14. Testing of Software compatibility. 15. MRP stickers and labelling. 16. Cleaning and packing. Kinko Computer Industries Manufacturing process of external Hard Disk Drives : 1. Physical inspection of casing. .....

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puts the same into a casing produced separately and sells these products in the market. 6.1 In the ease of the assessee. it is clearly evident that the activities undertaken fail to pass the litmus test "'manufacture" as defined by the Income tax Act, due to the very basic reason that nomenclature, character and use of the products namely Hard Disc and DVD Writer remains the same. The only difference made at the premises of the assessee is that the Hard Disc /DVD Writer is put into a casing to be attached to a USB Drive. The Hard Disc or the DVD Writer has the same function or use even without the casing also and the casing merely provides an outer shell or packing to protect it from external factors. Merely putting the HDD/DVD Writer into a casing does not amount to manufacture/production by any stretch of imagination. Both the items are i.e. Hard Disc & External Casing are easily available in the open market and various online sixes. Any layman can purchase the two and put she functional disc into the casing without using even a screw driver. (ii) Dissecting the claim of other activities being undertaken by the assessee in the process like testing, inspection et .....

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part of any business involved in trading too. The only steps which can be deemed as unique to a manufacturing process are the steps listed at serial number 8/9 of the assembly of various parts. These steps involved installation of memory inside a barebone computer, installation of hard disk drive and loading operating system on the computer respect of laptops and assembly of drive in casing out of the various steps listed in assembly of hard disk drives and external USB DVD writers. The question that follows is that has the appellant discharged the onus on him to establish that he is carrying on manufacturing and does he have the resources and manpower to carry out a manufacturing as claimed by the appellate. A perusal of the material on record showed very glaring facts which could not be ignored. The name are listed as under: a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P & L account include; only purchase cost and cartage inwards cost. c. No expense on manufacturing has been debited to the P & L account. d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no ma .....

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carrying out no manufacturing as claimed by him. Moreover, as brought out by the assessing officer, the appellant is sing various items from vendors in New Delhi and is selling most of its s to its sister concern situated at New Delhi, the contention of the appellant that the goods were purchased from New Delhi, assembled in HP ani sold back in Delhi does not make much business sense. 5.4 I find on a reading of the above in the light of the decisions relied upon by the assessee before the Bench that the reasoning and conclusion of the assessing officer upheld by the CIT(A) that the order of the CIT(A) on facts cannot be uphold. The decision of the coordinate Bench dated 09/08/2016 in ITA 248/CHD/2015 in the case of Indica software it is seen relied upon by the Revenue is wholly inapplicable. In the facts of the said case the coordinate Bench was considering the legitimacy of assessee s claim of having carried out production of software development. On a careful reading of the said decision it would be seen that the issue had been considered by the ITA T in the first round the claim of software development which necessarily required highly specialized man power for writing the soft .....

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s agency the wife was also deriving salary from some filling station. Both the partners on facts were not qualified as software professionals or had any past experience in the said business. The qualifications of the employees and their number also could not justifiably address the claim of software having been produced. The assets were noticed as incapable of being sufficient for software development activity as only one computer was noticed to have been available to the said firm. Accordingly it is seen that the said decision is entirely distinguishable on facts. In the facts of the present case the assessee has a partner namely Mr Sanjay Wadhwa who is a B Tech. Engineer and the staff employed was sufficient and capable of manufacture/produce the hardware by assembling; fitting; making functional; casing; screwing; attaching wire testing packing etc. the separate and distanct products. There is no dispute that whereas for developing software a highly qualified trained technical manpower is required whereas for the activities of the assessee a rudimentary knowledge and after initial limited training only dext finger work is more than enough. 5.6. Before addressing the case law rel .....

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urt. The judgment must be read as a whole and observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision. 5.8. Accordingly I find that the reliance placed upon the said decision by the Revenue is misplaced. On the contrary, a perusal of the decision dated 3rd of August 2017 of the Apex Court in the case of CIT-V versus M/s Hindustan Petroleum Corporation in CA No. 9295 of 2017 which has been relied upon by the Ld. AR supports the case of the assessee. It is seen that in the facts of the said case the assessee respondent was engaged in the process of bottling liquefied petroleum gas cylinders meant for domestic use. Benefit under sections 80 HH, 80 I and 80 IA in the respective years was under consideration. In the facts of the said case, the Assessing Officer had disallowed the deduction claimed on the grounds that LPG was produced and manufactured in refineries and thereafter there was .....

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ts machinery results in achieving of a final product. The parts or components utilized by the assessee in its assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to manufacture or production of an article. Therefore, the profit derived from each activity is eligible for the claim of benefit under s. 80-IA of the Act. 5.9. I further find that the decision mentioned at serial number 7 of the Apex Court also supports the view taken. We note that infact the decision of the jurisdictional High Court in the case of ACIT versus Micro-instruments company (2016) 97 CCH 0001PHHC of the jurisdictional High Court which had been relied upon by the Revenue has also been relied upon by the assessee. Specific para 8 of the said decision is reproduced hereunder: 18. We have carefully considered the rival submissions perused the order of assessment and material .....

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