2013 (2) TMI 483 - AT - Income Tax

Claim of deduction u/s 10B rejected - CIT(A) held that the assessee is not a manufacturer - assessee submitts that it manufactures eatables from raw material and that it is separate and distinct product known in the market and is covered by definition of Section 2(29BA) - Assessee is a 100% EOU engaged in the business of manufacturing and export of various food products like Paratha, Samosa, Dholka, Idli, vada etc. - Held that - As decided in Cit Versus Pankaj Jain Prop. Aagam Food Industries 2005 (12) TMI 525 - HIGH COURT OF JAMMU AND KASHMIR the activity of production of the foodstuff is a manufacturing activity (except for the items outsourced from other parties). Manufacturing of chappati, parath, samosa, dhokla constitutes manufacturing activity as but as in the case of mathia and chorafali the assessee does repackaging. Further from the details of sales submitted by the assessee it is find that the sales includes sale of coriander leaves , chorafali , custard apple pulp , magaj ladu , IQF shredded coconut and misc. items from which it appears that the aforesaid items are sourced ready made and not manufactured in the factory of assessee. The total sales of such items as per the summary is Rs. 85,68,942/-. Thus the aforesaid items which have been outsourced and not manufactured in the premises of the assessee but have only been repackaged with some other connected activities at the assessee s premises cannot be considered to be a manufacturing activity by the assessee. The profit for the year includes the profit on sale on outsourced items & rom the profits, the break-up of profit earned from outsourced items is not available therefore the assessee shall not be entitled to deduction under Section 10B on profit earned on sale on outsourced items - Matter of quantification of the quantum of profits earned on out-sourced and self manufactured items needs verification, therefore the matter be sent back to the file of the AO for the limited purpose to determine the profits of self manufactured items and that of outsourced items. The AO shall compute the profits eligible for deduction u/s.10B and allow the deduction under Section 10B in proportion of the turnover of self-manufactured and outsourced items - partly in favour of assessee.

Summary

Issues Involved:
1. Whether the assessee is a manufacturer and thereby entitled to deduction under Section 10B.
2. Whether the income from export incentives and interest income qualifies for deduction under Section 10B.

Issue-wise Detailed Analysis:

1. Whether the assessee is a manufacturer and thereby entitled to deduction under Section 10B:

The core issue is whether the activities of the assessee, engaged in manufacturing various food products, qualify as "manufacturing" under Section 10B of the Income Tax Act. The assessee, a 100% Export Oriented Unit (EOU), claimed deduction under Section 10B, which was denied by the Assessing Officer (AO) on the grounds that the preparation of food items does not constitute manufacturing. The AO relied on the Supreme Court decision in CIT v. Relish Foods and Indian Hotels Co. Ltd. v. ITO, which held that preparing food items from raw materials does not amount to manufacturing.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the preparation of food items from raw materials does not result in a commercially distinct commodity and hence does not qualify as manufacturing. The CIT(A) acknowledged that the assessee is an industrial undertaking but maintained that the preparation of food items does not constitute manufacturing as per the Supreme Court's ruling in Indian Hotels Ltd.

Upon appeal, the Tribunal considered the detailed process described by the assessee for manufacturing various food items, such as chapatti, which involves several stages of processing raw materials into a new product with a distinct name, character, and use. The Tribunal found that the assessee's activities transform raw materials into new and distinct products, thereby qualifying as manufacturing. The Tribunal distinguished the facts of the present case from the Indian Hotels decision, noting that the assessee is an industrial undertaking, unlike the hotel business in the cited case.

The Tribunal also referred to the decision of the J&K High Court in Pankaj Jain Prop. Aagam Food Industries, which held that converting raw materials into bread is a manufacturing activity, and the assessee was entitled to deduction under Section 80IB. Similarly, the Tribunal concluded that the assessee's activities constitute manufacturing, making it eligible for deduction under Section 10B, except for items outsourced from other parties.

2. Whether the income from export incentives and interest income qualifies for deduction under Section 10B:

The additional ground raised by the assessee pertained to the eligibility of export incentives and interest income for deduction under Section 10B. The Tribunal noted that this ground was not seriously argued by the assessee and hence dismissed it without detailed discussion.

Conclusion:

The Tribunal held that the assessee's activities of manufacturing various food items qualify as manufacturing under Section 10B, making it eligible for the deduction, except for the profits earned from outsourced items. The matter was remanded to the AO for determining the profits from self-manufactured and outsourced items to compute the eligible deduction. The additional ground regarding export incentives and interest income was dismissed. The appeal was partly allowed.