TMI Blog2021 (5) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining . This definition is both exhaustive ( means ) and inclusive ( shall include ), too. The inclusive part is merely clarificatory, though. Later, through the Finance Act, 2009, clause (29BA) was inserted in section 2 of the IT Act, defining the expression manufacture : On facts, Chowgule [ 1980 (11) TMI 61 - SUPREME COURT] has held that diverse quantities of ore possessing different chemical and physical compositions are blended to produce ore of the requisite chemical and physical composition demanded by the foreign purchaser. And obviously, as a result of this blending, the quantities of ore mixed in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical compositions. Thus, what is produced by such blending is ore of a different chemical and physical composition. In other words, when the chemical and physical compositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires verification by the Revenue. So, it has restored this issue. That restoration or remand is to enable the AO to determine the market value of the crude ore the Assessee consumed, based on the value paid by the assessee for the crude ore from the third parties during the year. Thus, there should be re-computation of the profit the Assessee derived from the 100% EOU units eligible for exemption u/s 10B. Tribunal has directed the AO to recompute the exemption available u/s 10B to the assessee in respect of Amona as well as Chitradurga units after ascertaining the market value of the crude ores transferred by the assessee to these units from its extraction divisions. It must be based on the average market value as the assessee has paid to the third-party suppliers the crude ore. And the determination must be after the AO s giving proper and sufficient opportunity to the assessee to adduce material evidence in this regard. We reiterate that the remand or the restoration of the issue is complete, and the AO shall determine the price untrammelled by the Tribunal s observations, if any. And that determination is in accordance with law and only after accounting for the qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT, Circle-I, Panaji, notified the assessee under section 143 (2) of Income Tax Act. Later, the case was assigned to the Joint Commissioner of Income Tax, Range-1, Panaji, who issued a notice under section 129 of the Act in August 2011. In response to the notices, the assessee furnished information and produced the relevant documents. 2. Eventually, on 30.12.2011, the Assessment Officer did the following: (a) Disallowed expenditure of ₹12,29,25,049/- under section 14A of the IT Act, read with Rule 8D of IT Rules; (b) Declared that the assessee was ineligible for deduction of expenditure incurred on Scientific Research and Developments (R D) under section 37 of Act. So, the AO disallowed the expenditure of ₹1,94,55,376/- and added it back to the profit and loss account; (c) Following the pattern of assessment for AY 2006-07 regarding the same assessee, the AO disallowed the commission payment. As a result, ₹9,88,29,729/- was added back to the total income; (d) ₹1,55,76,549/- was added back to the total income. It was on account of demurrages the assessee paid to a shipping company in Pakistan; (e) The assessee claimed as expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Confirmed the disallowance under section 14A of the Act; (b) Declared that the assessee was ineligible for deduction of expenditure incurred on Scientific Research and Developments (R D) under section 37 of Act. So, the AO disallowed the expenditure of ₹1,94,55,376/- and added it back to the profit and loss account; Deleted the addition of expenditure on disallowance of expenditure on R D. (c) Following the pattern of assessment for AY 2006-07 regarding the same assessee, the AO disallowed the commission payment. As a result, ₹9,88,29,729/- was added back to the total income; Confirmed the disallowance of commission paid to non-resident agents. (d) ₹1,55,76,549/- was added back to the total income. It was because of demurrages the assessee paid to a shipping company in Pakistan; Confirmed the disallowance of demurrage payment u/s. 40(a)(i) of the Act (e) The assessee claimed as expenditure education cess and fringe benefit tax, tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ruled in Assessee s favour. (d) On the Assessee s claim for deduction under section 10B of the Act regarding the three 100% export-oriented units, it ruled in the Assessee s favour. (e) On the Assessee s claim for depreciation under section 32 (l) (iia) of the Act, the Tribunal ruled in the Assessee s favour. (f) It confirmed the CIT (A) s finding in Assessee s favour on the issue of the losses in foreign exchange transactions. 5. Aggrieved, the Revenue has filed this Tax Appeal before this Court. While admitting the appeal, the Court framed these substantial questions of law: (I) Has the Tribunal correctly applied the definition of manufacture given in SEZ Act 2005, which is applicable only for section 10AA of the IT Act and which imposes various conditions for the utilization of profits? (II) Has the Tribunal correctly directed the AO to restrict the open market right of the iron ore to average purchase value by applying section 10B (7) read with section 80 IA (8) of the IT Act though there are differences in grade/quality and though it was not at arm s length price? (IIa) Is the Tribunal right in not considering pro rata overhead costs in determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought not to have been swayed by the definitional dynamics of section 10AA of the IT Act and section 2 (29) of IT Act; (2) it misunderstood the ratio of Chowgule s case; (3) blending of iron ore does not amount to manufacturing; (4) addition of machinery does not turn an old unit into a new one; and (5) the Tribunal has misapplied the concept of average purchase price . Respondent-Assessee: 11. Shri Pardiwala has, to begin with, submitted that the Assessee s three Units are 100% EOUs; that aspect, according to him, has not been disputed. As a matter of fact, the Tribunal has ruled on how new Units have come into existence. Then, he has taken us to section 10B of the IT Act. Shri Pardiwala has explained how that section suffered an amendment and what applied to the Assessment Year in question. 12. To elaborate, Shri Pardiwala has submitted that the conversion of tailings or making crude run of iron ore into marketable end-product- that is, processing crude ore into lumps or fines-does amount to production or manufacture. According to him, Tribunal has neither misunderstood nor misinterpreted Chowgule. In other words, Chowgule deals with one face ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited and utilized for the business. 17. The exemption is available to units commencing activity after April 1, 2006 but before April 1, 2021. Section 10AA stands, according to Kanga Palkivala Kanga Palkivala s Law and Practice of Income Tax, Arvind P. Datar, 11 ed., e-book., on an identical footing as section 10A, since the language of both sections is similar. Besides, they are both in Chapter III, so the principles laid down in judgments under s 10A would apply to this section as well. The renowned commentary also notes that the services must be provided, or articles or things must be manufactured from the SEZ unit. Where the core of the Assessee's services are provided from the unit, the assessee cannot be denied the benefit because some activities were performed outside of it. 18. Section 10B of the Act is a special provision concerning newly established 100% export-oriented undertakings. This section grants a deduction of the profits and gains derived by a hundred per cent. export oriented undertaking (EOU) from the export of articles or things or computer software. The nature of this deduction is very similar to that under section 10A. The deduction is granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crushed and are subjected to further processing. What finally emerges is iron ore lumps and fines. Different sizes of lumps having different chemical and physical compositions are mixed mechanically as per the product composition ordered by the overseas buyers. 23. Processes undertaken at Codli Ultra Fine Recovery (UFR) Plant the waste called tailings generated at the iron ore beneficiation plant is further processed and low-grade iron ore is produced. Eventually, The dewatered Ultra Fines , which is the final product, is exported. And, as a matter of record, all the Units gained approval as EOUs from the Development Commissioner. 24. As to the Unit at Amona, the question was whether it is a new Unit. In paragraph 42.2 of the judgment, the Tribunal has recorded its findings on facts. It accepted the Assessee s application for a personal visit to the Unit, and its Members, along with the IT officials, did visit the Unit. It was to understand the type of plant machinery installed at the iron ore Beneficiation plant and also the processes undertaken for production . 25. In the end, the Tribunal has recorded the finding that the nature of activities at Amona plant and Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining . This definition is both exhaustive ( means ) and inclusive ( shall include ), too. The inclusive part is merely clarificatory, though. 31. Later, through the Finance Act, 2009, clause (29BA) was inserted in section 2 of the IT Act, defining the expression manufacture : manufacture , with its grammatical variations, means a change in a nonliving 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. 32. The Tribunal has heavily relied on Chowgule. But the Revenue insists that the Tribunal has misread and misapplied Chowgule s case holding to these appeals. First, this decision was under the Central Sales Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chanical ore handling plant amount to processing? The answer to this question, according to Chowgule, depends on what the true meaning and connotation of the word processing is. It holds: [T]his word has not been defined in the Act and it must therefore be interpreted according to its plain natural meaning. Webster's Dictionary gives the following meaning of the word process : to subject to some special process or treatment; to subject (especially raw material) to a process of manufacture, development of preparation for the market etc.; to convert into marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing fruits and vegetables by sorting and repacking. Where therefore any commodity is subjected to a process or treatment with a view to its development or preparation for the market , as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Pio Food Packers, as quoted by Chowgule, the Supreme Court has examined whether there is any manufacturing if the commodity subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. 39. According to Pio Food Packers, commonly 'manufacture' is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another. Indeed, there may be several stages of processing and, perhaps, a different processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, takes the commodity to the point where commercially it can no longer be regarded as the original commodity but, instead, is recognised as a new and distinct article that a manufacture can be said to take place. 40. Does the processing of the original commodity bring into existence a commercially different and distinct commodity? In fact, Pio Food Packers has answered that question affirmatively. If we interpret section 2 (29BA) in the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under Section 32A of the IT Act in respect of the machinery the Assessee used in mining activity. This question was in the face of the fact that the Assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. 46. On appeal from Tribunal, this Court held that extraction and processing of iron ore did not amount to manufacture . It has, however, concluded that extraction of iron ore and the various processes would involve production within the meaning of Section 32A(2)(b)(iii) of the IT Act. So, it has declared that the Assessee was entitled to the benefit of investment allowance under Section 32A of the Act. Eventually, the Apex Court has upheld this Court s view. It has, in fact, held that the word production is wider in ambit and it has a wider connotation than the word manufacture . 47. In CIT v. Fateh Granite (P) Ltd. 314 ITR 32, this Court interpreted the unamended section 10B of the IT Act. It has held that the expression manufacture or production are different expressions and the word production has a wider meaning. The word production under section 10B, being analogous to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le business in the above manner presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. 51. Indeed, according to the Explanation appended to sub-section market value means (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where transferring such goods or services is a specified domestic transaction as referred to in section 92BA. 52. Sometimes there may be a close connection between the assessee s eligible business and any other person s business. In the alternative, the courses of business between them are so arranged that the business transacted between them produces to the assessee more than the ordinary profits expected from the eligible business. Then, in computing the profits and gains of that eligible business for determining the deductions under this section, the Assessing Officer shall take the profits as may be reasonably deemed to have been derived therefrom . Nevertheless, if the above-mentioned arrangement involves a specified domestic transaction referred to in sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recompute the exemption available u/s 10B to the assessee in respect of Amona as well as Chitradurga units after ascertaining the market value of the crude ores transferred by the assessee to these units from its extraction divisions. It must be based on the average market value as the assessee has paid to the third-party suppliers the crude ore. And the determination must be after the AO s giving proper and sufficient opportunity to the assessee to adduce material evidence in this regard. 57. At any rate, we reiterate that the remand or the restoration of the issue is complete, and the AO shall determine the price untrammelled by the Tribunal s observations, if any. And that determination is in accordance with law and only after accounting for the quality or grade of the iron ore supplied. Third Substantial Question of Law: (III) Has the Tribunal correctly deleted the disallowance of ₹12.29 crore under section 14A of the IT Act in accordance with Rule 8D of IT Rules as held by the Mumbai Special Bench at Tribunal in ITO v. Daga Capital Management Pvt. Ltd,? 58. As the record reveals, the Assessee has contended that it has borrowed no funds for the investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) has applied section 80HHC, which is entirely a different code for an entirely different purpose. It terms the CIT (A) s approach preposterous. The basis of 10% adopted by the CIT (A), the Tribunal points out, cannot be considered while computing disallowance u/s 14A. If that basis was to be adopted then there was no need to introduce Rule 8D . 63. Indeed, section 14A is a pivotal provision. Inserted by the Finance Act 2001 with retrospective effect from 1 April 1962, section 14A aims to disallow expenditure incurred in relation to income which did not form part of the total income under the IT Act. This section has to be read with Rule 8D, which provides the method of calculation of disallowance under this section. Section 14A statutorily recognises the principle that tax is leviable only on the net income. That is, the profits and gains of business or profession are taxed after deducting expenditure from income. In that regard, the assessee need not establish a one-to-one correlation between income and expenditure. The provision reads: Section 14A. Expenditure incurred in relation to income not includible in total income.- (1) For the purposes of computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and securities, on the shares held as stock-in-trade and when earning of such dividend income is, therefore, incidental to trading in shares . Given the factual disparity, we need not examine the Tribunal s decision in Daga Capital Management. 67. To cut short our discussion, we may rely on this Court s earlier decision (rendered by this very Bench) on identical facts. In CIT v. Sociedade De Fomento [2020] 429 ITR 358 (Bom), this Court has relied on its earlier judgment in CIT, Goa v. M/s. Sociedade De Fomento Industrial Pvt. Ltd. (Decided 22 October 2020). In that case, one of the substantial questions of law was identical to the one before us. Rejecting the Revenue's contention, this Court has noted that the respondent invested certain funds in exempted categories such as mutual funds; it earned income. During the assessment year, income from such sources stood exempted under section 10(35) of the IT Act. The only issue was whether the respondent incurred any expenditure while earning that exempted income and whether it included that expenditure in the common indirect expenditure of its own. The Court ruled in the respondent-assessee s favour. First, unlike ..... X X X X Extracts X X X X X X X X Extracts X X X X
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