2015 (12) TMI 293 - AT - Income Tax

Rejection of claim for deduction u/s 10B - tax authorities have come to the conclusion that the assessee has not carried on any manufacturing activity - Held that - The assessee has imported diamonds, purchased gold locally and exported the jewellery. Thus, the articles purchased and the articles exported are two different articles. The export of jewellery cannot be carried out without manufacturing the same. The assessee has also explained about its manufacturing process. Even though the conversion of gold into mountings is carried out through outsourcing, final shaping of jewellery and fitting of diamonds were carried out at the place of the assessee. Hence, in our view, the activities carried on by the assessee should be considered as manufacturing activity only and hence it is eligible to claim deduction u/s 10B of the Act.- Decided in favour of assessee.

Summary

Issues Involved:

1. Eligibility for deduction under Section 10B of the Income Tax Act.
2. Determination of whether the assessee carried out manufacturing activities.
3. Adequacy of evidence provided by the assessee to substantiate manufacturing claims.
4. Applicability of SEZ Act's definition of "manufacture" to the assessee's activities.
5. Evaluation of the assessee's records and documentation.
6. Examination of the tax authorities' alternative views and conclusions.

Detailed Analysis:

1. Eligibility for Deduction under Section 10B of the Income Tax Act:

The primary issue revolves around the assessee's claim for deduction under Section 10B, which was rejected by the assessing officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO's rejection was based on the conclusion that the assessee did not carry out any manufacturing activity, thus making it ineligible for the deduction.

2. Determination of Whether the Assessee Carried Out Manufacturing Activities:

The AO cited several reasons for concluding that no manufacturing activity was conducted:
- No plants and machinery were found during the survey.
- Absence of jewellery designs during the survey.
- Inability to locate workers at the given addresses.
- Meagre payments for labour and wages, which were deemed insufficient for the scale of operations.
- Lack of basic worker details.
- Application of the test of human probabilities, concluding that the activities were not genuine manufacturing.

3. Adequacy of Evidence Provided by the Assessee to Substantiate Manufacturing Claims:

The assessee argued that it was engaged in manufacturing handmade diamond jewellery, which does not require extensive machinery. The assessee provided:
- Purchase registers showing import of diamonds and local purchase of gold.
- Finished stock registers and sales invoices to substantiate the export of manufactured jewellery.
- Evidence of supervision and control by Customs and Excise authorities.
- Details of the manufacturing process, including outsourcing certain tasks and performing final assembly and diamond fitting in-house.

4. Applicability of SEZ Act's Definition of "Manufacture" to the Assessee's Activities:

The AO also argued that the activities did not meet the SEZ Act's definition of "manufacture," as the processes were carried out by third parties and not by the assessee. However, the tribunal noted that the SEZ Act's definition includes processes like assembly and fabrication, which were part of the assessee's operations.

5. Evaluation of the Assessee's Records and Documentation:

The tribunal observed that:
- The tax authorities did not dispute the import of diamonds, purchase of gold, and export of jewellery.
- The assessee maintained proper records, including Bond Register and DPCC Register, inspected by Customs and Excise authorities.
- The absence of heavy machinery was not a valid ground to reject the manufacturing claim, given the nature of handmade jewellery.

6. Examination of the Tax Authorities' Alternative Views and Conclusions:

The tax authorities' alternative view was that even if some activities were carried out, they did not constitute "manufacturing" under the SEZ Act. The tribunal disagreed, citing that the final product (jewellery) was distinct from the raw materials (gold and diamonds), thus qualifying as manufacturing.

Conclusion:

The tribunal concluded that the assessee's activities constituted manufacturing and directed the AO to allow the deduction under Section 10B. The order emphasized that the absence of heavy machinery and the lower labour charges did not negate the manufacturing activities, especially when supported by substantial documentation and oversight by Customs and Excise authorities.

Result:

The appeal filed by the assessee was allowed, and the AO was directed to grant the deduction under Section 10B of the Income Tax Act.