9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2014 (1) TMI 1127 - AT - Income TaxEligibility for deduction u/s 80IC - Held that - the definition of manufacture as defined in s. 2(29BA) though not applicable but certainly can be used as a guide. As per clause (b) of section 2 (29BA) the definition of manufacture means bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure - for the purpose of income tax it needs to be found out as to whether the process undertaken by an Assessee meets the test of manufacturing so as to become eligible for deduction for undertaking the manufacturing activity - Following Nemat Enterprises (P) Ltd vs ACIT 2010 (12) TMI 268 - ITAT, MUMBAI - It is possible that Central Excise Tariff Act (CETA) deems certain processes as manufacturing by placing certain products in a particular chapter for the purpose of excise duty even if they do not fulfil strict criteria of a manufacturing process but for the purpose of Income-tax we have to find out whether the product meets the test of manufacturing activity. Following COMMR. OF INCOME TAX-V, NEW DELHI Versus M/s ORACLE SOFTWARE INDIA LTD. 2010 (1) TMI 9 - SUPREME COURT OF INDIA - In each case when an issue of this nature arises for determination, the Department has to study the actual process undertaken by the assessee - If an operation/process rendered a commodity fit for use for which it would otherwise not be fit, the operation/process fell within the meaning of the word manufacture - The Department that, in all such cases, they should have a panel of experts who may be engaged in appropriate cases so that the cases need not be remitted - CIT(A) has not obtained any report from an expert to conclude that the new product which has come into existence by undertaking the process of mixing and grinding is on account of manufacturing process but has accepted the contention of Assessee - A definite finding is required to determine as to whether the activity of the assessee can be termed as manufacture in the light of the requirement of the Act so as to enable the Assessee to claim deduction u/s 80IC. Higher gross profit Held that - The Assessee has submitted the reason for having gross profit in excess of 70% to be on account of saving in excise duty, VAT, higher price charged on account of longer credit period and lower administrative cost - There is no finding on the said aspect by CIT(A) and he has accepted the contention of Assessee The issue is restored for fresh adjudication.
Issues Involved:
1. Eligibility for deduction under Section 80IC of the Income Tax Act. 2. Whether the activities conducted by the assessee qualify as "manufacture" or "production." 3. Justification of high gross profit margins. 4. Alleged arrangement between the assessee and its sister concerns to inflate profits. Detailed Analysis: 1. Eligibility for Deduction under Section 80IC: The primary issue in both appeals was whether the assessee was entitled to claim a deduction under Section 80IC of the Income Tax Act. The assessee, engaged in the manufacture of reactive dyes, claimed a deduction of Rs. 3,03,68,280/- under Section 80IC. The Assessing Officer (AO) disallowed the claim, concluding that the activities carried out by the assessee did not amount to "manufacture" or "production" as required under Section 80IC. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, but the Revenue appealed against this decision. 2. Whether the Activities Conducted by the Assessee Qualify as "Manufacture" or "Production": The AO observed that the assessee achieved a high turnover in a short period and noted inconsistencies in the production process. The AO concluded that the activities were merely processing and not manufacturing, as there was no significant transformation of raw materials into a new product. The AO also relied on a report from the Directorate of Income Tax (Investigation), which indicated that the factory was not operational during the inspection. The CIT(A) disagreed, noting that the Central Excise Department had classified the assessee's activities as manufacturing. The CIT(A) cited Supreme Court decisions, including ITO v/s. M/s. Arihant Tiles & Marbles (P) Ltd. and India Cine Agencies v/s. CIT, to support the view that the activities constituted manufacturing. The CIT(A) also noted that the definition of "manufacture" under Section 2(29BA) of the Income Tax Act, though not applicable for the assessment year in question, supported the assessee's claim. 3. Justification of High Gross Profit Margins: The AO questioned the high gross profit (GP) and net profit (NP) margins reported by the assessee, suggesting they were not achievable in the normal course of business. The AO suspected that the high profits were due to an arrangement with sister concerns to inflate profits artificially. The CIT(A) accepted the assessee's justification for the high margins, which included exemptions from Central Excise and VAT/CST, longer credit periods, savings on intermediary costs, and transportation costs borne by the purchaser. The CIT(A) also noted that the gross profit of the sister concern remained consistent over three years, undermining the AO's suspicion of inflated profits. 4. Alleged Arrangement Between the Assessee and Sister Concerns to Inflate Profits: The AO suspected an arrangement between the assessee and its sister concerns to inflate profits, citing Section 80IA(10) of the Income Tax Act. However, the CIT(A) found that the gross profit of the sister concern remained consistent, and the reasons provided by the assessee for the high margins were plausible. The CIT(A) concluded that there was no arrangement to inflate profits. Conclusion: The Tribunal found that the CIT(A) had not obtained an expert report to conclude that the activities constituted manufacturing. The Tribunal remanded the matter to the CIT(A) for further examination, including obtaining an expert opinion on the chemical composition of the raw materials and finished goods. The Tribunal also directed the CIT(A) to examine the justification for the high profit margins and the alleged arrangement with sister concerns. In conclusion, the appeals were allowed for statistical purposes, and the CIT(A) was directed to re-examine the issues with a detailed and expert-based approach. The Tribunal emphasized the need for a clear and definite finding on whether the activities qualified as manufacturing or production and whether the high profit margins were justified.
|
