TMI Blog2018 (3) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 has been rejected on suspicious and surmises ignoring the facts on record and on an incorrect appreciation of law for the reasons set out herein above at length. Accordingly for the reasons set out herein above the claim of the assessee is allowed. - ITA No. 377/Chd/2017 - - - Dated:- 24-1-2018 - Ms. Diva Singh, Judicial Member For the Assessee : Shri Sudhir Sehgal For the Revenue : Shri Manjit Singh ORDER PER DIVA SINGH, J.M. The present appeal has been filed by the assessee assailing the correctness of the order dated 16/01/2017 of CIT(A) Shimla, pertaining to 2012 13 assessment year on the following grounds: 1. That the Worthy Commissioner of Income Tax (A) has erred in confirming the order of the Assessing Officer with regard to disallowance of deduction u/s 80IC on manufacturing of External Hard Disk and External DVD Writer and fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 justified in denying relief qua the two products and issued an enhancement notice for justifying why even the deduction allowed by the AO not be withdrawn for Laptops and mouse. The specific reason set out in the show cause notice read 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 includes 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 manufacturing has been carried out by you. 2.3 Rejecting the explanation offered which have been reproduced in the impugned order at page 8 to 15 of the impugned order the CIT(A) held that the assessee did not pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly 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 the books of accounts audited and considering the form 10 CCB filed in support of the claim on 10/09/2011 claiming 80 IC deduction to the tune of ₹ 92,30,390/- and declaring a total income of ₹ 12,330/-. The said return was also processed under section 143 and had attained finality. Thus it was his submission that since in the year under consideration also the assessee was carrying on the very same activity the occasion for the Department to deviate from the consistent view taken for the very same activity was contrary to the settled legal position. It was submitted that the fact on record that the assessee fulfilled all the conditions prescribed under the act and there is no new material on the basis of which the view has been varied the order of the CIT(A) ran counter to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable 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 and it would show that the CIT(A) has held that Inspection, testing, branding, packaging, clearing and shipping etc are activities not unique to manufacturing. It was his submission that the assessee is not saying that these are unique to manufacturing the assessee was merely demonstrating that what are the steps taken and thus, it was argued the claim has been rejected on frivolous reasons. It was his submission that the CIT-A has held that the activity is mere assembly of different parts and the claim of the assessee has been rejected on the reasoning that the balance sheet did not show heavy deployment of capital assets or highly trained manpower etc. It was his submission that these are frivolous reasons and wrong facts. One of the assessee s partner Sh. Sanja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gether. 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 which would include : a) PCB ; b) IR Sensor; 2) mouse plastic which would include : housing/casing (upper plastic cover); b) housing casing/(lower plastic cover); 3) wire ; 4) screws and 5) branding stickers labels etc. 3.7 Thus it was his submission that none of these individual items purchased can be said to constitute a computer mouse it is only after the individual items are assembled fitted, soldiered made functional by running a software and made ready to use after screwing attaching a specific length and quality of wire ensuring and testing that the functions are performed by the left and right clicks etc. only thereafter it can be sold as a separate product as a computer mouse. 3.8 Accordingly as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Final product External /USB DVD Writer Characteristics/products Product 02 (External/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Paperbook attached. Further it is also submitted in this regard that all the products of the assessee firm satisfy the impugned conditions of manufacture as prescribed under the Act, as pointed out in Point No. 5 of our submissions above. Your attention in this regard is drawn to the Table below showing the conditions being fulfilled by the assessee firm with regard to the definition of manufacture for each of the products separately. Characteristics /Products External DVD Writer External Hard Disk Computer laptop Computer Mouse Name/ Nomenclature -Refer table in Point No. 6 above, and -also note that this product is sold as External / USB DVD writer and not mere DVD writer as alleged by the AO -Refer table in Point No. 6 above, and -also note that this product is sold as External / USB Hard Disk and not mere Hard Disk as alleged by the ld. AO -Refer table in Point No. 6 above, and -also note that this product is sold with a completely different name as compared to the components used -Refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name specifically. Value addition and increase in value The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. Now, since all the four aforesaid products produced/manufactured by the assessee firm clearly satisfy the tests laid down in the definition of manufacture given in the Income Tax Act and even tests of marketability and value addition as laid down in various judgements in this regard, therefore there remains no dobut that the said process falls well within the meaning of manufacture / production as given under the Act. 8. It is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of production during the relevant assessment year. iii. Further the lack of qualified and sufficient personnel as alleged by the AO is completely not justified, where the sales of the assessee firm have not been doubted and accepted, as is and similarly, no doubts have been raised on the production facility of the assessee firm, thereby indicating that the production has, infact, taken place at the rented premises of the assessee firm and therefore there without finding any defect in the books of account, the allegation of lack of employees and qualified personnel is not justified, where infact the partners themselves could have been a part of the production team. Also, even the' Worthy CIT(A) has resorted to reiterating the opinion of the AO, in this regard without bringing on record any material in this regard. The Worthy CIT(A) has also alleged that the assessee has not been able to prove his case of being a manufacturer, based on his assumptions, without bringing out any finding in this regard. Once the books and activity carried out by the assessee is accepted/ not doubted, then the onus to prove that the assessee was not involved in the activity of manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IND ENERGY LTD. (2011) 333 ITR 0192 (Madras HC)at page 38 of the Judgment Set ACIT vs. DIXON TECHNOLOGIES (I) (P.) LTD. (2013) 35 CCH 0484 (Del Trib) CIT vs. TATA LOCOMOTIVE ENGINEERING CO. LTD. (1968) 68 ITR 0325 (BOM)ar page 41 of the Judgment Set From the above it can be clearly inferred that assembly of goods infact amounts to manufacture, as held in the various judgements above. The Ld. AO and the worthy CIT(A) have completely overlooked the said facts and without bringing any relevant material on record, have made such heavy disallowances in the case of the assessee, which is both bad in law and against the facts and circumstances of the case. 10. Further reliance in this regard is placed on the following Judgements of the Apex Court and jurisdictional ITAT, in support of the fact that the process undertaken by the assessee amounts to manufacture , namely: India Cine Agencies: Computer Graphics Ltd vs CIT, (2009) 308 ITR 98 (SC)aU5age 44 of the Judgment Set The assessee converted jumbo rolls of photographic films into small flats anchfQlls^in the desired sizes. It claimed that the same amounted to manufacture/production for the purpose of allowances unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts. The issue in the facts of the said case was the activity of software production which was held questionable on the basis of the enquires made by the Inspector. In the facts of that case unlike the present case the activity was carried out for only one year and which has been distinguished point wise in the separate tabular synopsis filed separately. In the case of the assessee it was submitted the evidence is discarded on presumption as no such enquiries were made the said activity have been carried on by the assessee in the last two assessment years. 3.12 Reliance was also placed on the meaning of production which has been held to be a term of much wider meaning than the word manufacture as considered by the Apex Court in the case of CIT Vs. N.C. Budharaja and Co. [1993] 204 ITR 412, as quoted in India Cine Agencies vs. CIT, Madras on 12th November, 2008 various judicial pronouncements on page 423 that : The word production has a wider 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. Sr. DR Mr. Manjeet Singh reading through the assessment order and the impugned order submitted that admittedly the claim of the assessee has correctly been denied in view of the fact that there were a mere handful of employees barely qualified with absolutely no visible investment in machinery barring took kits/ laptops / computers etc. The absence of heavy machinery or any other major electrical expenditure are facts which come in the way of claim of carrying out the so called manufacturing activity. It was his submission that this was a mere assembly activity and not a manufacturing activity. The taxable income it was submitted has rightly been enhanced by the CIT(A). The decision relied upon by the CIT(A) it was submitted was fully applicable to the facts of the present case. The case laws relied upon in the paper book it was submitted do not help the assessee in any manner. In these circumstances relying upon the decision of the Apex Court in the case of Sun Engineering cases 198 ITR 298 (SC) it was his submission that picking a line or fact from one case and making the ratio Decidendi applicable to the other cases without establishing a parity on facts has been frowned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2. Physical inspection of drives. 3. Testing and examination of the casing. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. it has been observed that in case o! Laptops; various loose parts are assembled, resulting into an integrated machine, which has a different character, name and use. I he same observation can be made in respect of assembly of various parts resulting into production of a Mouse. However, in the case of external Hard Disc Drive and external DVD Writer, it is observed that the assessee purchases functional I lard Disc-Drive and DVD Writer and 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assembly of external hard disk drives and assembly of external USB DVD writers. The appellant has furnished no details of the requirements of steps involved undertaken to assemble/Manufacturer mouse. The perusal of the steps for assembly of the various items show that these steps involved are nothing but physical inspection, testing, branding, packing, cleaning, shipping, etcetera. These steps are not unique to manufacturing and are normally a 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Furniture Fixture 7700 36720 11.03.2012 2. Computers 32519 0 3. Cellular Phone 1600 4 Tool Kit 17863 Total 59682 36720 It is pertinent to mention here that the appellant has conveniently changed the head of the asset from office equipment shown at rupees 17863 in the original schedules attached to the annual accounts to Toolkit. This very clearly shows that the appellant is not disclosing the true facts of the case Opening Stock 2131896.71 1667638.86 Add: Purchase 43029367.58 20643761.58 Add: Cartage Inward 41720.00 20430.00 45202984.29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the peculiar facts taken into consideration by the said Bench which have been referred to by the Coordinate Bench in the second round which have been set out in para-2 of the aforesaid decisions and are self explicit. These are reproduced hereunder for ready reference: The coordinate bench further held that the AO shall not review his decision relating to manufacturing of computer software whether falling within the ambit of industrial undertaking eligible for deduction u/s 80IB or not. Pursuant to the order of the coordinate bench the Id AO passed an assessment order u/s 144 of the Act rejecting the books of account stating the reasons about discrepancy in accounting of electricity bills, non availability of complete address of the parties to whom the sales of software is made, absence of any cost of purchase of software and on the competence of the employees of the assessee to develop the software. Subsequently, deduction u/s 80IA citing the incompetence of the staff/ employee of the assessee, for adequacy of the equipment of the equipments available in the form of computers etc, absence of complete details with respect to the development of the software, non avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the deduction there under is sought. Relying on the said observation it was submitted that it has been held that the AO would be entitled to ascertain in each of the assessment years whether or not the conditions of Section 80-IB remained fulfilled. However on a reading of the said decision it is seen their Lordships have also very categorically held in para 12 of the said decision and cautioned the Revenue as under: 12. However, while undertaking this exercise, the AO is not entitled to reopen an issue that had been decided in respect of a previous assessment year. In other words, an AO is not entitled to question the validity of the grant of a deduction under section 80-IB in a pervious assessment year on any ground. The AO would not be entitled to say that a particular condition was not fulfilled in an earlier assessment year if the assessee had been granted the deduction in the assessment year in question before him on the ground that the assessee had failed to fulfill a condition precedent to the grant of a deduction in another assessment year. That would amount to an AO reopening an assessment in respect of another assessment year without following the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which could be carried out only by experts. This was unsuccessfully challenged by the Revenue before the Hon ble High Court which concurred with the view taken by the ITAT. The said decision was challenged in appeal further before the Apex Court and the Court apart from other reasons considering the earlier decision in ITO vs Arihant Tiles and Marbles [2010] 320 ITR 79 (SC) and after considering the process and considering the case law on the issue concluded that it was a manufacturing activity. When the said decision is considered in the light of the processes which have been discussed by the assessing officer itself in the assessment order and the individual products used for assembling; fitting programming; for the limited purposes of carrying out the functions of the said product; screwing; attaching wires; soldiering etc. transfer/copy software to make the product functional testing, labeling, packing etc. indelibly leads to the production of an entirely separate and distinct product from its original components. Accordingly, I find that the claim of the assessee has wrongly been disallowed. The decision is fortified by the various decisions cited before the Bench which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d deduction under s. 80-IA of the Act both in asst. yrs. 1996-97 and 1997-98 of ₹ 16,95,358 and ₹ 62,42,673 respectively. The said claim of deduction stands duly accepted and allowed in intimation under s. 143(1) of the Act, which orders have also attained finality. It has been held in Saurashtra Cement Chemical Industries Ltd. vs. CTT (1979) 11 CTR (Guj) 139 : (1980) 123 ITR 669 (Guj) in the context of provisions of s. 80J of the Act that once relief had been granted in the initial year of assessment then he cannot examine the question again and decide the withdraw the relief, which has been already once granted without disturbing the relief granted in the initial year. Similar view has been expressed by Bombay High Court in the case of CIT vs. Paul Brothers (1995) 216 ITR 548 (Bom) and it was held that there is no provision for withdrawal of deduction for subsequent years unless and until it could be established that such deduction had been withdrawn in the initial assessment year. Applying the above to the facts of the instant case, we are firstly of the considered opinion that since industrial undertaking of the assessee has been accepted to be an eligible un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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