2018 (3) TMI 520 - AT - Income Tax

Deduction u/s 80IC - manufacture of external hard disk and DVD writer - even qua the laptops and mouse the deduction allowed was withdrawn - AO was of the view that the assessee needed to demonstrate that the commodity which was subjected to the process of manufacture could be identified as a different character in name as well as in use i.e; a distinct commodity had come into creation as a result of his manufacturing activity. Held that - Apex court in the case of CIT-V versus Oracle software India Ltd (2010 (1) TMI 9 - SUPREME COURT OF INDIA) wherein the duplicacy process was considered to have changed the basic character of a blank CD which thus became dedicated to a specific use. In the facts of the present case the specific steps processes have been identified the employees are available a partner of the assessee firm having a technical qualification is available on record the product being manufacture/produce admittedly does not use heavy electricity or heavy machinery similarly does not require highly literate, technically qualified staff the fact that the individual parts on going through the process of manufacture result in production of products which are separate and distinct from the sum total of the purchased parts which are identified as separate products in the market having separate and distinct identity from its individual parts. The claim has been rejected on suspicious and surmises ignoring the facts on record and on an incorrect appreciation of law for the reasons set out herein above at length. Accordingly for the reasons set out herein above the claim of the assessee is allowed.

Issues Involved:
1. Disallowance of deduction u/s 80IC on manufacturing of External Hard Disk and External DVD Writer.
2. Determination of whether the activities undertaken with regard to the manufacturing of Laptop and Mouse, External Hard Disk, and External DVD Writer amount to manufacturing.
3. Consideration of whether the CIT(A) properly evaluated the submissions made during the appellate proceedings.

Issue-wise Detailed Analysis:

1. Disallowance of deduction u/s 80IC on manufacturing of External Hard Disk and External DVD Writer:

The assessee declared an income of ?18,140 after claiming a deduction under section 80IC. The Assessing Officer (AO) noted that the assessee claimed to be engaged in manufacturing and trading computer parts and peripherals. The AO required the assessee to explain the manufacturing process, which was provided in detail. However, the AO allowed the deduction for manufacturing laptops and mouse but rejected the claim for External DVD Writer and External Hard Disk, citing that the activities did not amount to manufacturing as per the definition under the Income Tax Act. The AO relied on the Supreme Court decision in Dy. CST vs. Pio Food Packers.

2. Determination of whether the activities undertaken with regard to the manufacturing of Laptop and Mouse, External Hard Disk, and External DVD Writer amount to manufacturing:

The CIT(A) concluded that no manufacturing activity was undertaken by the assessee. The CIT(A) noted negligible manufacturing expenses, lack of machinery, and insufficient evidence of manufacturing activities. He issued an enhancement notice and subsequently withdrew the deduction allowed for laptops and mouse by the AO. The CIT(A) reasoned that the activities such as inspection, testing, branding, packaging, and shipping did not constitute manufacturing. Additionally, the CIT(A) highlighted the absence of qualified personnel, machinery, and significant manufacturing expenses, which led to the conclusion that the assessee was not engaged in manufacturing.

3. Consideration of whether the CIT(A) properly evaluated the submissions made during the appellate proceedings:

The assessee argued that the Revenue's conclusions were based on incorrect appreciation of law and facts, emphasizing that the activities carried out were consistent with the previous assessment years where deductions were allowed. The assessee provided detailed explanations and flowcharts of the manufacturing processes for each product, arguing that the assembly of various parts resulted in distinct and marketable products. The assessee cited various judicial precedents to support the claim that assembly activities amount to manufacturing. The ITAT found that the CIT(A) and AO's conclusions were based on suspicions and incorrect appreciation of facts. The ITAT noted that the processes undertaken by the assessee resulted in distinct products, and the absence of heavy machinery or highly qualified personnel did not negate the manufacturing activity. The ITAT relied on various judicial precedents to conclude that the assessee's activities amounted to manufacturing and allowed the deduction under section 80IC.

Conclusion:

The ITAT found that the assessee's activities amounted to manufacturing, and the deduction under section 80IC was wrongly disallowed by the AO and CIT(A). The ITAT allowed the assessee's appeal, emphasizing that the processes undertaken resulted in distinct and marketable products, and the absence of heavy machinery or highly qualified personnel did not negate the manufacturing activity. The ITAT relied on various judicial precedents to support its conclusion.

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