2012 (8) TMI 803 - AT - Income Tax

Whether the deduction u/s 80IB can be allowed in relation to the profit earned by the assessee from job work activity done on behalf of the sister concern - whether the job work activity can be considered as manufacturing activity - Held that - There is no provision in section 80IB as in the case of section 80IA that deduction cannot be allowed in case of contract work and therefore, the deduction has to be allowed in case the assessee had manufactured the goods on behalf of the assessee on job work basis. What constitutes manufacture is well settled that it is only when the change or a series of changes, take the commodity to the point where commercially it can no longer be regarded as original commodity but is recognized as a new distinct article, manufacturing can be said to have taken place. Deduction u/s 80IB cannot be disallowed only on the ground that the product by the assessee has been used as a raw material by the sister concern. In case the product is a distinct commercial product different from the raw materials used by the assessee, the claim has to be disallowed. We, therefore, set aside the order of the CIT(A) and restore back the matter to the AO for limited purpose to verify whether emulsifier produced by the assessee on behalf of the sister concern is a new commercial product difference from the raw materials used and recognized as such in the market.

Summary

Issues:
- Allowability of claim of deduction under section 80IB of the Income Tax Act, 1961 for manufacturing done on job work basis on behalf of a sister concern.

Detailed Analysis:

Issue 1: Allowability of deduction under section 80IB for job work manufacturing
The dispute revolved around the Revenue's challenge regarding the allowability of the deduction claimed by the assessee under section 80IB of the Income Tax Act, 1961 for manufacturing activities carried out on a job work basis for a sister concern. The Assessing Officer (AO) disallowed the deduction, stating that the assessee was not engaged in manufacturing activity as the ultimate product was being produced by the sister concern. The AO referred to section 80IB, which requires the assessee to manufacture or produce articles not specified in the Eleventh Schedule for claiming the deduction. Consequently, the AO disallowed a portion of the deduction claimed by the assessee based on the profit derived from job work activities.

Issue 2: Assessee's arguments and CIT(A) decision
The assessee contested the AO's decision before the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that it was indeed engaged in manufacturing activities and was eligible for the deduction under section 80IB. The assessee highlighted that in previous assessment years, the AO had accepted similar job work activities as manufacturing and allowed the deduction. The CIT(A) agreed with the assessee, acknowledging that the emulsifier produced by the assessee for the sister concern constituted a new commercial product distinct from the raw materials used. Therefore, the CIT(A) allowed the deduction under section 80IB for the manufacturing activities carried out on a job work basis.

Issue 3: Tribunal's decision and direction to AO
Upon appeal by the Revenue, the Income Tax Appellate Tribunal (ITAT) examined the case. The Tribunal noted that the determination of whether the job work activities constituted manufacturing was crucial for allowing the deduction under section 80IB. While the assessee argued that the emulsifier produced was a distinct commercial product, the Revenue contended that it was merely an intermediate process. The Tribunal decided to set aside the CIT(A)'s decision and directed the AO to verify whether the emulsifier produced by the assessee was indeed a new commercial product different from the raw materials used and recognized as such in the market. The Tribunal emphasized that if the product was distinct, the deduction should be allowed.

Conclusion:
In conclusion, the ITAT allowed the Revenue's appeal for statistical purposes and directed the AO to re-examine the nature of the emulsifier produced by the assessee to determine its eligibility for the deduction under section 80IB. The Tribunal's decision highlighted the importance of establishing the distinctiveness of the manufactured product for claiming tax deductions under relevant provisions of the Income Tax Act.