2019 (3) TMI 1308 - HC - Income Tax

Deduction u/s 80IA - Manual processing - least consumption of electricity - manufacture of a herbal product Bandruff by a manual process with the use of some chemicals and small machinery - no new industrial unit, machinery or infrastructure as claimed - Whether Tribunal was right in holding that the Assessee was entitled to the benefit of Section 80IA even if it does not do the manufacturing process on its own but gets it done by third parties? - HELD THAT - The manufacture of a herbal product Bandruff by a manual process with the use of some chemicals and small machinery can also amount to manufacture or production of a different commercial article which is the basic requirement under Section 80IA of the Act. The purpose of the said provision is to encourage industrialisation and investment in an industry. The purchase of plant and machinery, and consumption of electricity are not mandatory requirement as was thought by the learned Assessing Authority in the present case. The learned Tribunal after describing the said manufacture / production process of the herbal product was, in our opinion, perfectly justified in holding that the same amounted to manufacture of a different commercial article and that therefore, the Assessee was entitled to the deduction under Section 80IA - decided against revenue

Summary

Issues:

1. Entitlement to deduction under Section 80IA based on the existence of new industrial unit, machinery, or infrastructure.
2. Entitlement to deduction under Section 80IA when manufacturing process is outsourced to third parties.
3. Deletion of additions on account of inflated purchase price for raw materials.

Analysis:

Issue 1:
The primary issue in this case was whether the Assessee was entitled to the benefit of deduction under Section 80IA of the Act for the Assessment Years 1996-1997, 1997-1998, and 1998-1999. The Revenue contended that there was no new industrial unit, machinery, or infrastructure as claimed by the Assessee. However, the Tribunal, as the final fact-finding authority, allowed the deduction based on the manufacturing activities carried out by the Assessee. The Tribunal noted that the process of converting raw materials into finished goods constituted manufacturing activity, including drying of herbs, fumigation, grinding, blending, quality control, and packaging. It was observed that even though some processes were outsourced, the Assessee's involvement in supervision and quality control justified the deduction under Section 80IA.

Issue 2:
Another issue raised was whether the Assessee could avail the benefit of Section 80IA even if the manufacturing process was outsourced to third parties. The Tribunal cited a previous decision where it was held that an Assessee engaged in manufacturing activity by doing a part of the process themselves and outsourcing the rest could still be considered eligible for the deduction. In this case, the Assessee's involvement in various aspects of the manufacturing process, such as quality control and supervision, justified the allowance of the deduction under Section 80IA.

Issue 3:
The third issue pertained to the deletion of additions on account of inflated purchase price for raw materials. The Revenue argued that the Assessee had adopted a devious method of buying back its own manufactured product at an inflated price for use as raw materials in its herbal shampoos. However, the Tribunal found that the Assessee had obtained necessary approvals and clearances from relevant authorities, indicating the existence of a manufacturing unit. The Tribunal set aside the order of the CIT (Appeals) and directed the Assessing Officer to allow the deduction under Section 80IA for the relevant assessment years.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the manual manufacturing process of the herbal product constituted production of a different commercial article, meeting the requirements of Section 80IA. The Court dismissed the Revenue's appeals, stating that the Assessee was entitled to the deduction under Section 80IA.