2014 (7) TMI 1239 - HC - Income Tax

Entitlement to benefit under Section 10A - substantial value addition made before the product is delivered - products manufactured and produced by third parties - assessee is in the business of providing medical transcription facilities - Held that - Assessee is in the business of transcribing medical transcription. It has outsourced portion of its work as done by the sub contractor is in crude form and cannot be delivered in such form to the overseas customers. The assessee has to process the said product so as to make it marketable. In other words, as rightly pointed out by the appellate authorities value addition has to be done. It is only when that value addition is made, the said product is exported, foreign exchange is earned. The manufacture or production done by the assessee, which is eligible for exemption under Section 10A would be applicable because the transaction done by the sub- contractors in the crude form undergoes a change in the process of the assessee. Therefore, as rightly held that the assessee is entitled to the benefit of Section 10A - Decided in favour of assessee.

Summary

Issues:
1. Entitlement to benefit under Section 10A of the Income Tax Act for substantial value addition before product delivery.
2. Deduction under Section 10A denied due to sub-contracted work outside customs bonded area.
3. Interpretation of value addition for products manufactured by third parties.
4. Justification for extending benefit of Section 10A to the assessee.

Analysis:

1. The case involved two appeals by the revenue concerning an assessee providing medical transcription services. The assessing authority denied deduction under Section 10A, stating that services were sub-contracted outside the STPI facility. The Appellate Authority found substantial value addition by the assessee before product delivery, hence granting the Section 10A benefit. The Tribunal upheld this decision, emphasizing the necessity of processing by the assessee before exporting the product, justifying the value addition.

2. The substantial question of law raised was whether the assessee could claim Section 10A deduction for products manufactured by third parties with value addition. The Tribunal affirmed that the assessee's processing of sub-contracted work before export constituted significant value addition, making it eligible for Section 10A benefits. The STPI approval for manufacturing within the customs bonded area did not preclude this interpretation.

3. The second substantial question of law focused on the necessity of value addition for products manufactured by third parties eligible for Section 10A deduction. The Tribunal clarified that the crude form of work done by sub-contractors required processing by the assessee to become marketable for overseas customers. This value addition by the assessee justified the Section 10A benefit, as the product underwent a transformation before export, earning foreign exchange.

4. The judgment concluded that the assessee's processing of sub-contracted work constituted value addition essential for claiming Section 10A benefits. Both the Appellate Authority and the Tribunal correctly recognized this value addition, leading to the dismissal of the revenue's appeals. The finding of fact regarding the assessee's entitlement to Section 10A benefits was upheld, emphasizing the importance of value addition in the export process.