2018 (1) TMI 323 - AT - Income Tax

Exemption u/s 10B - apportionment of expenditure between EOU and non EOU - Held that - We find that this issue is covered, in favour of the assessee, by decisions of the coordinate benches, in assessee s own case, for several assessment years. We have also noted that separate year end financial statements for the EOU are also placed before us and no specific defects, except for the inter unit transfer price, are pointed out in the same. In view of these discussions, as also bearing in mind entirety of the case, we are unable to see any legally sustainable merits in the grievance of the revenue. Denial of 10B exemption in respect of Benzarone Pure and BFX-P i.e. De Acid - the process involved is only purification of product into final product and that it involves only removal of some impurities, in effect the process did not lead to manufacture of a new product - Held that - We find that the controversy is by now well settled inasmuch as Hon ble Supreme Court has held, in the case of ITO Vs Arihant Tiles & Marbles Pvt Ltd 2009 (12) TMI 1 - SUPREME COURT that even conversion of marble blocks by sawing them into slabs and tiles and polishing amounts to manufacture or production of article or thing . In the present case, the products as inputs and as outputs were different for all practical purposes of their use and application. On the similar lines is earlier judgment of Hon ble Supreme Court in the case of India Cine Agencies Vs CIT 2008 (11) TMI 15 - SUPREME COURT wherein conversion of jumbo rolls of photographic films into small flats and rolls in desired size was held to be production and manufacture. The objection of the CIT(A) is thus not really sustainable on facts and in law. Even a purification process, or removal of impurities, as along as the end product has different usage, value and applications does amount to a new product coming into existence. Transfer price of product from non EOU to EOU unit - Held that - The price at which the work in progress has to be transferred from non EOU unit to EOU unit must not only be reasonable but fair and equitable as well. In case non EOU has a legitimate right over more than 10% of profits, as indeed is our opinion, such a right cannot be brushed aside by saying that after all 10% is enough. The question before us is not of what will be reasonable profit in the hand of non EOU unit generally, but of what is reasonable and fair share of profit that should be allocated to the non EOU unit. The profits are to allocated to both the units in a fair and reasonable manner. Let us look at the facts of this case. The overall margin is 28.34%, the processing is done by both the units, and the processing work done by the non EOU unit, by no stretch of logic, is less than the processing work done by the EOU unit. In the light of these facts, in our considered view, allocation of equal profits to EOU and non EOU unit on an equal basis is quite fair and reasonable. We decline to interfere in the well reasoned findings of the CIT(A). We approve his action on this point. The order of the CIT(A) is thus modified only in respect of exclusion of profits in respect of two products- i.e. Benzarone Pure and Di Acid. We direct that the profits in respect of these products will also be eligible for benefit under section 10B. Except for this modification, the order of the CIT(A) stands confirmed.

Summary

Issues Involved:

1. Deletion of disallowances under section 10B by CIT(A).
2. Profit margin on transfer of intermediates between units.
3. Recomputing profits of both units on an estimate basis.
4. Exclusion of net profit attributable to the sale of specific products from book profits for computing allowable deduction under section 10B.

Detailed Analysis:

1. Deletion of Disallowances under Section 10B:

The revenue's primary grievance was that the CIT(A) erred in deleting the disallowances under section 10B, arguing that the expenses were incurred jointly and apportioned between the general unit and the EOU, thus making the deduction under section 10B not allowable as the assessee did not fulfill the condition under section 10B of the Act. The Tribunal found that this issue was covered in favor of the assessee by decisions of the coordinate benches in the assessee’s own case for several assessment years. The Tribunal noted that separate year-end financial statements for the EOU were provided and no specific defects, except for the inter-unit transfer price, were pointed out. Therefore, the Tribunal saw no legally sustainable merits in the grievance of the revenue.

2. Profit Margin on Transfer of Intermediates:

The assessee's appeal included grievances related to the profit margin of 10% charged on the transfer of intermediates by the general unit to the EOU unit. The CIT(A) had confirmed the AO's view that this margin was to claim excess deduction under section 10B. The CIT(A) observed that the profit and gain of the general unit and the EOU on account of such inter-unit transfers needed to be recomputed as per the provisions of sub-section 8 of section 80IA. The Tribunal noted that the CIT(A) found the market values of WIP indeterminable and directed the AO to compute the profits by distributing them equally between the units. The Tribunal approved the CIT(A)'s action, stating that the allocation of equal profits to both units was fair and reasonable.

3. Recomputing Profits of Both Units:

The CIT(A) recomputed the profits of both units on an estimate basis by distributing the profits equally, as the market value of WIP was not determinable. The CIT(A) provided a detailed computation table and directed the AO to adopt these figures for computing the taxable income and the grant of deduction under section 80IB. The Tribunal found the CIT(A)'s recomputation method to be fair and reasonable, considering the facts of the case and the processing work done by both units.

4. Exclusion of Net Profit Attributable to Specific Products:

The CIT(A) directed the AO to exclude the net profit attributable to the sale of Benzarone Pure and BFX-P from book profits for computing the allowable deduction under section 10B. The Tribunal noted that the CIT(A) held that the process involved in these products was only purification and did not amount to manufacturing a new article or thing. However, the Tribunal found this objection unsustainable, referencing the Supreme Court's judgments in the cases of ITO Vs Arihant Tiles & Marbles Pvt Ltd and India Cine Agencies Vs CIT, which held that even conversion processes amount to manufacturing or production. Thus, the Tribunal directed that the profits in respect of these products would also be eligible for benefit under section 10B.

Conclusion:

The Tribunal modified the CIT(A)'s order only in respect of the exclusion of profits for Benzarone Pure and Di Acid, directing that these profits would be eligible for deduction under section 10B. Except for this modification, the Tribunal confirmed the CIT(A)'s order. The revenue's appeal was dismissed, and the assessee's appeal was partly allowed.