2015 (4) TMI 638 - HC - Income Tax

Entitled to the benefit under Section 10-B - department submits that most of the activities are outsourced and very small part of the manufacture was undertaken by the assessee - Held that - The assessee is a manufacturer of the Ballistic Helmets and Bullet Proof (bullet resistant) Jackets . Only a part of the manufacturing activities was got done by the assessee from outside agency and that to under the direct control and supervision of the managerial and technical staff available with the assessee. Therefore, even on the basis of such an outsourcing the assessee has to be held to be the manufacturer of the products for which it had been approved as 100% EOU. Accordingly it cannot be denied the benefit of exemption under section 10B of the Act. In the instant case, a new product has come out at final stage. It is not the case of changing the label or the cover of the product. When totally new product came into existence after the entire process then we are of the view that the assessee is entitled to the benefit of Section 10B of the Act. We set aside the impugned order passed by the Tribunal and restore the order passed by the first appellate authority pertaining to the benefit of exemption under Section 10B of the Income Act. In the case of CIT vs. Heartland Delhi Transcription Services Pvt. Ltd. reported in (2014 (7) TMI 810 - DELHI HIGH COURT) the Hon ble Delhi High Court has ruled that after removal of sub sections (9) and (9A) from the statute book w.e.f. 1.4.2004 and simultaneous insertion of sub-section (7A) w.e.f. the same date, benefit under section 10B is applicable even where the ownership of the industrial undertaking, in continuity. In arriving at the said conclusion the Hon ble Delhi Court has referred to and relied upon various case laws as has been referred to in the preceding paragraphs and finally held that sub section (7A) is an enabling provision , meant for continuity of benefit under section 10 B, even after change in ownership of the industrial undertaking . - Decided in favour of the assessee

Issues Involved:
1. Entitlement to benefit under Section 10-B of the Income Tax Act.
2. Validity of the survey under Section 133A and its impact on the assessment.
3. Whether outsourcing part of the manufacturing process disqualifies the assessee from claiming the benefit under Section 10-B.
4. Transfer of industrial undertaking and its impact on the benefit under Section 10-B.

Issue-wise Detailed Analysis:

1. Entitlement to Benefit under Section 10-B of the Income Tax Act:
The core issue was whether the assessee, a 100% Export Oriented Unit (EOU), was entitled to the benefit under Section 10-B of the Income Tax Act. The Tribunal had denied the benefit, but the High Court found that the assessee was indeed entitled to the exemption. The Court noted that the assessee had outsourced only a part of the manufacturing process, and the final product was assembled and packed by the assessee itself. The Court emphasized that the definition of "manufacture" includes processes such as fabrication, assembly, and bringing into existence a new product, which the assessee fulfilled.

2. Validity of the Survey under Section 133A and Its Impact on the Assessment:
A survey under Section 133A was conducted at the assessee's factory, revealing discrepancies in the number of machines claimed to be used. The Assessing Officer (A.O.) concluded that the assessee was not a 100% manufacturing unit. However, the Court determined that the survey findings did not negate the assessee's claim for exemption under Section 10-B, as the manufacturing process, including outsourcing, was under the control and supervision of the assessee.

3. Outsourcing Part of the Manufacturing Process:
The Court examined whether outsourcing parts of the manufacturing process disqualified the assessee from claiming the benefit under Section 10-B. It was held that outsourcing certain stages of manufacturing did not disqualify the assessee, provided the overall control and supervision remained with the assessee. The Court referred to several precedents where similar arrangements were considered manufacturing activities eligible for tax benefits.

4. Transfer of Industrial Undertaking and Its Impact on the Benefit under Section 10-B:
The Court addressed the issue of whether the transfer of the industrial undertaking affected the benefit under Section 10-B. It was clarified that the benefit under Section 10-B continues in the hands of the successor company if the entire undertaking is transferred as a going concern. The Court cited CBDT Circular No. 7 of 2003, which supports the continuity of benefits in cases of amalgamation or demerger. The Court emphasized that the benefit is attached to the undertaking, not the owner, and thus, the successor company is entitled to the exemption for the unexpired period.

Conclusion:
The High Court allowed the appeals, setting aside the Tribunal's order and restoring the first appellate authority's decision granting the benefit under Section 10-B to the assessee. The Court concluded that the assessee's partial outsourcing of manufacturing activities did not disqualify it from claiming the exemption, and the transfer of the industrial undertaking to a successor company did not affect the entitlement to the benefit. The judgment underscored the importance of maintaining control and supervision over the manufacturing process and upheld the principle that tax benefits should continue with the undertaking, irrespective of changes in ownership.

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