2005 (7) TMI 607 - AT - Income Tax

Exemption u/s 10A - The process of fixing size labels, buttons checking, ironing and packing for making the garments amounted to Manufacturing process undertaken by the assessee Or Not - Export of readymade garments - HELD THAT - We find that the Circulars by Ministry of Finance relied by the assessee clearly strengthen the contention of the assessee as vide the above Circular No. 314/20/97-CX. It has been clarified that even galvanizing of black MS Pipes tantamount to manufacturing activity. CBDT Circular 495 relied by the assessee also says that unit merely assemble or process goods for exports would also get the benefit of the tax holidays. We find that the observation of the Assessing Officer that the assessee-company was not involved in manufacturing process to enable it to claim deduction u/s 10A was not correct as the above Circular of Board, Ministry of Finance, decision of Metro Readywear Co. 1976 (7) TMI 62 - HIGH COURT OF KERALA AT ERNAKULAM and the licence granted by the Development Commissioner clearly indicate that the above stitching of buttons, ironing, labelling, etc. done by the assessee on the garments received by it from M/s. Arihant Garments was to be reckoned as manufacturing process against which the claim u/s 10A was justifiable and, hence, the ld. CIT(A) was justified in directing the Assessing Officer to allow the claim of the assessee under section 10A. We, therefore, are of the opinion that the ld. CIT(A), while adjudicating the appeal before him, has passed a well reasoned and discussed order which does not call for any inference from our side and accordingly uphold the same and reject the ground raised by the revenue. In the result, the appeal filed by the revenue is dismissed.

Summary

Issues:
1. Eligibility for exemption under section 10A of the Income Tax Act for income from exports.
2. Determination of manufacturing activities carried out by the assessee.
3. Interpretation of relevant legal precedents and circulars in relation to manufacturing processes for claiming tax benefits.

Detailed Analysis:
Issue 1: The primary issue in this case is whether the assessee qualifies for exemption under section 10A of the Income Tax Act for income derived from exports. The Assessing Officer initially denied the claim, contending that the assessee was not engaged in substantial manufacturing activities. However, the ld. CIT(A) allowed the exemption, emphasizing the purpose of encouraging exports for earning foreign exchange. The ld. CIT(A) noted that the goods were exported and brought foreign exchange into the country, thereby fulfilling the conditions of section 10A.

Issue 2: The crux of the matter revolves around determining the manufacturing activities undertaken by the assessee. The Assessing Officer argued that the assessee's involvement was limited to minor processes like labelling and packing, which did not qualify as manufacturing. In contrast, the ld. CIT(A) considered the processes of fixing labels, stitching buttons, ironing, and packing carried out by the assessee as essential activities enabling export. The ld. CIT(A) concluded that these processes constituted manufacturing activities, justifying the assessee's claim under section 10A.

Issue 3: The interpretation of legal precedents and circulars played a crucial role in the decision-making process. The ld. CIT(A) referenced the judgment in Metro Ready Wear Co. case, which deemed even minor processes like ironing as manufacturing. Additionally, circulars from the Ministry of Finance and CBDT supported the assessee's position by clarifying that certain activities, such as galvanizing of pipes, qualified as manufacturing. The renewal of the license by the Development Commissioner of the Export Processing Zone further indicated compliance with the terms and conditions necessary for claiming tax benefits.

In conclusion, the Appellate Tribunal upheld the decision of the ld. CIT(A) and dismissed the appeal filed by the revenue. The Tribunal found that the assessee's activities, including labelling, stitching, ironing, and packing, constituted manufacturing processes essential for export, aligning with the provisions of section 10A. The Tribunal's decision was based on a comprehensive analysis of the facts, legal precedents, and circulars, emphasizing the importance of encouraging exports and earning foreign exchange.