2015 (6) TMI 612 - HC - Income Tax

Entitlement to Exemption u/s 10B - whether assessee is not a manufacturer? - Held that - During the survey made on M/s. Arora Industries and M/s. Anil Industries certain invoices were raised on the assessee were impounded. The word semi-finished goods were not mentioned. It was explained in this regard that the word unpacked and unlable condition is mentioned and packing and labelling were also made by the assessee. This description means that the said garments were semi-finished. Therefore there is no discrepancy in the said invoices. No garment can be sold in the export market without making proper label, tags, iron and packing etc as has been done by the assessee in the present case. It was also explained that supplier was not able to manufacture finished garments. They had to manufacture semi finished garment and export the semi finished garments was not possible. The assessee had received huge export order and therefore the assessee had to make export of the garments. The suppliers could not export since they did not have any export order and therefore no question of claiming duty draw back by the suppliers and therefore they had to issue disclaimer certificates to the assessee. Therefore the suppliers did not supply any ready made garments. It was also clarified that the assessee is not doing all the processes on each and every piece of garment. For e.g. bar code labels were affixed on some of the garments, emblem graphics, stickers were affixed on some of the garments. Accordingly heat treated emblem was given on some of the garments, ironing was made, packing of garments was also made on different garments. In view of the processes carried out by the assessee as mentioned herein above may be all the processes of the semi finished garments will tantamount and will be treated as a manufacture. As regards the notices remained unserved on the suppliers, it was stated that non service on the supplier was not known to the assesee and therefore such non service of notice cannot make the assessee to loose exemption u/s 10B of the Act. In the circumstances and facts of the case we hold that the assessee is a manufacturer and entitled to exemption u/s 10B of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessee firm is engaged in manufacturing or producing any article or thing.
2. Whether the assessee firm is entitled to exemption under Section 10B of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Manufacturing or Producing Articles:
The primary contention of the Revenue is that the assessee firm did not manufacture or produce any article or thing, as indicated by the audit report and other documents. The audit report mentioned that the assessee purchased knitting and sewing machines, which were not put to use, and no depreciation was claimed. Additionally, the audit report in Form 3CD indicated the purchase and sale of garments without any raw material consumption, suggesting trading activities rather than manufacturing.

The assessee argued that it purchased semi-finished garments and performed various manufacturing processes such as finishing, labeling, hanger and PIP bags packing, ironing, bar coding, and tagging to make the garments export-worthy. These processes were claimed to transform the semi-finished garments into finished products, qualifying as manufacturing under various legal definitions and judicial precedents.

The court noted that the term "manufacture" includes processes such as labeling, re-packing, and other activities that bring a new product into existence. The assessee's activities were considered manufacturing as they involved significant transformation of the semi-finished garments into finished products ready for export.

2. Entitlement to Exemption under Section 10B:
The Revenue contended that since the assessee did not manufacture or produce any article or thing, it was not eligible for exemption under Section 10B of the Income Tax Act. The AO disallowed the exemption, arguing that the assessee's activities did not meet the criteria for manufacturing as per the audit report and other evidence.

The assessee countered this by submitting that it was an approved 100% export-oriented unit by the Development Commissioner, Falta Special Economic Zone, and had fulfilled all conditions stipulated under Section 10B. The assessee's processes of transforming semi-finished garments into finished products were argued to constitute manufacturing, as supported by various judicial decisions and definitions of "manufacture."

The court examined the definitions of "manufacture" from different legal sources and judicial precedents. It was highlighted that even processes like labeling, packing, and other finishing activities could qualify as manufacturing if they result in a new product with a distinctive character or use.

The court also considered the fact that the Development Commissioner had approved the assessee's unit for manufacturing and exporting garments, and this approval had not been withdrawn. The expenses incurred by the assessee for the manufacturing processes were duly reflected in the books of account and verified by the AO.

Based on the comprehensive analysis of the facts, definitions, and judicial precedents, the court concluded that the assessee's activities did constitute manufacturing. Consequently, the assessee was entitled to exemption under Section 10B of the Income Tax Act.

Conclusion:
The court dismissed the Revenue's appeal, affirming that the assessee firm was engaged in manufacturing activities and was eligible for exemption under Section 10B of the Income Tax Act. The court found no infirmity in the order of the CIT(A), who had rightly allowed the claim of the assessee for exemption.

Order Pronounced:
The appeal of the Revenue was dismissed, and the order was pronounced in the court on 30.4.2015.