2015 (2) TMI 413 - HC - Income Tax

Entitlement to benefit under Section 10B - 100% EOU - outsourcing of manufacturing process - assessee was engaged in manufacture or production of an article or thing - Held that - Section 10B of the Act is beneficial provision and has been enacted to give tax concession or exemption to 100% export oriented units engaged in manufacture or production of articles, things or computer software. The exemption is only granted if the assessee has been declared as an 100% export oriented undertaking which means an undertaking approved by the Board appointed in this behalf under the Industries (Development and Regulation) Act, 1951. It is an undisputed and a factual position recorded by the Tribunal that the respondent assessee had an export oriented unit in Noida Export Processing Zone, which was duly approved. The Tribunal has also recorded that the Development Commissioner, Noida Export Process Zone, had extended all facilities and privileges admissible to the said unit under the Export-Import Policy 1997-2002. One of the conditions, for establishment of an undertaking in the said zone was that the undertaking should be manufacturing engineering products and the entire production should be exported, after excluding the rejects and permissible sales in the domestic tariff area. The respondent has entered into an agreement with the said authority for carrying on the said business. The fact that the respondent assessee had assembled the entire plant outside India from the goods supplied and manufactured in India would include the expenditure incurred for commissioning and providing technical services outside India, after excluding expenses in form of payment made in foreign exchange for technical services provided outside India. It is not the case of the Revenue that the respondent assessee had made payment in foreign exchange for technical services provided outside India. It is apparent that the respondent assessee did not self-manufacture or produce most of the articles or things which were exported and used for setting up the plant. The assessee had undertaken detailed engineering drawings and as per the specification and drawings, the actual manufacture and production work was outsourced. Throughout the said process, inspection was carried out and only after approval, the goods were dispatched. The goods were re-inspected, checked, assembled and disassembled, before they were exported out of India. Only upon satisfactory performance and ensuring that there was perfect matching, the goods were exported. We are in agreement with the findings recorded by the Tribunal that the aforesaid activities qualify and should be treated as manufacture or production of goods by the assessee himself. Decided favour of the respondent-assessee

Issues Involved:
1. Entitlement to benefit under Section 10B of the Income Tax Act, 1961.
2. Determination of manufacturing or production activities.
3. Application of the principle of consistency.
4. Interpretation of "manufacture" and "production" under Section 10B.

Issue-wise Detailed Analysis:

1. Entitlement to Benefit under Section 10B:
The core issue was whether the respondent assessee was entitled to the benefit under Section 10B of the Income Tax Act, 1961, which provides deductions for profits derived from a 100% export-oriented undertaking engaged in the manufacture or production of articles or things. The assessee, a company engaged in the business of manufacturing, trading, and exporting engineering goods, claimed deductions for assessment years 2007-08 and 2008-09. The Assessing Officer denied these claims, arguing that the assessee did not manufacture any goods at its Noida unit but outsourced the manufacturing to third parties. The Tribunal, however, affirmed the assessee's claim, noting that the unit was duly approved as a 100% export-oriented undertaking and had undertaken significant activities to qualify for the deduction.

2. Determination of Manufacturing or Production Activities:
The Tribunal examined the activities carried out by the assessee, which included detailed engineering analysis, system design, equipment specifications, and development of engineering drawings. The assessee outsourced the actual manufacturing to vendors but conducted process and final inspections, assembled and tested the goods at its Noida unit, and then exported them. The Tribunal found that these activities qualified as manufacturing or production. The court agreed, emphasizing that the assessee's activities, such as assembling, testing, and ensuring the perfect matching of parts before export, constituted manufacturing or production.

3. Application of the Principle of Consistency:
The Commissioner of Income Tax (Appeals) and the Tribunal applied the principle of consistency in favor of the assessee. This principle implies that if a particular view has been taken in earlier years, it should be followed in subsequent years unless there is a material change in facts or law. The Tribunal noted that the Development Commissioner of Noida Export Processing Zone had extended all facilities and privileges to the assessee's unit, which was a 100% export-oriented undertaking. The court upheld this application, reinforcing the importance of consistency in tax assessments.

4. Interpretation of "Manufacture" and "Production" under Section 10B:
The court delved into the definitions and interpretations of "manufacture" and "production" as per Section 10B. It referred to various judicial precedents and statutory provisions, noting that the terms should be given a wide and liberal interpretation to fulfill the legislative intent behind Section 10B. The court cited the Supreme Court's elucidation in various cases, emphasizing that "manufacture" implies a change resulting in a new and distinct article, while "production" has a broader scope, including activities that bring a new product into existence. The court concluded that the assessee's activities, including outsourcing manufacturing, conducting inspections, and assembling and testing goods, fell within the ambit of "manufacture" or "production" under Section 10B.

Conclusion:
The court affirmed the Tribunal's decision, holding that the respondent assessee was entitled to the benefit under Section 10B of the Income Tax Act, 1961, as it was engaged in the manufacture or production of articles or things. The court emphasized the importance of a liberal interpretation of "manufacture" and "production" to fulfill the legislative intent and the principle of consistency in tax assessments.

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