2012 (7) TMI 531 - AT - Income Tax

Denial of exemption claim u/s 10B - Revenue stated that exemption u/s. 10B applies to an assessee in which the undertaking begins to manufacture or produce articles or thing or computer software - assessee is 100% EOU for export of manufactured jute bags packet tea tea bags bulk tea - Held that - The process involved in export of blended and processed tea by the assessee which involves various steps right from the purchase of tea in bulk packaging from different Auction Centres in India and overseas to the physical stuffing of the packaged teas in containers for shipment - Assessee Company has established a new industrial Undertaking (100% EOU) for the manufacture of packet tea/tea bulk tea in the Falta Special Economic Zone and it holds a green card issued by the Development Commissioner Ministry of Commerce Government of India Kolkata. Assessee Company s said 100 Export Oriented Undertaking (EOU) is also registered with Central Excise Authorities. Section 2(r) of the Special Economic Zones Act 2005 which is a Central Act passed by the Parliament in May 2005 and which Act also governs the said industrial unit owned by Assessee Company herein also defines the term manufacture to include processes such as blending - in CHOWGULE & CO. PVT. LTD. Versus UNION OF INDIA 1980 (11) TMI 61 - SUPREME COURT OF INDIA the word used producing in relation to the tea mixture which was produced through the process of blending. Though Section 10A did not contain a definition for manufacture the definition of the term contained in Section 2(r) of the 2005 Act was incorporated in Section 10AA with effect from February 10 2006. Admittedly this definition covers blending also. Therefore blending and packing of tea done by the assessee qualifies for exemption under Section 10AA - the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. 10A and units in the free trade zone provided u/s. 10AA and the exemption available to 100% EOU u/s. 10B are very similar in nature and the wordings of the statutory provisions are similar in nature is correct - assessee was recognised as a 100% EOU division and the Department had no case that the assessee s unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee s 100% EOU it would defeat the very object of sections 10B. Thus the assessee who are in the business of blending and processing of tea and export thereof in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s. 10B. Further assessees who are in the business of blending and processing of tea in respect of undertakings in free trade zones are manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A - in favour of assessee.

Summary

Issues Involved:
1. Whether blending and processing of tea for export qualifies as "manufacture" or "production" under Section 10A/10B of the Income-Tax Act, 1961.

Detailed Analysis:

Issue 1: Qualification of Blending and Processing of Tea as "Manufacture" or "Production"

Facts of the Case:
The assessee, engaged in the business of blending, processing, and exporting tea, claimed exemption under Section 10B of the Income-Tax Act, 1961. The assessee's activities included purchasing various grades of tea, blending them to achieve a uniform quality, and packaging them for export. The Assessing Officer (AO) denied the exemption, arguing that blending does not constitute "manufacture" or "production."

Arguments by the Assessee:
The assessee contended that blending tea involves significant processing, resulting in a product with distinct quality and characteristics. The process includes cleaning, blending, and packaging, which should qualify as "manufacture" under Section 10B. The assessee also highlighted that the Development Commissioner and Central Excise authorities recognized the unit as a 100% Export Oriented Unit (EOU).

Arguments by the Revenue:
The Revenue argued that blending tea does not transform the product into a new article with different characteristics. Citing various judicial precedents, including the Supreme Court's decision in CIT v. Tara Agencies, the Revenue maintained that blending constitutes "processing" but not "manufacture" or "production."

Tribunal's Analysis:
1. Definition and Scope of "Manufacture":
- The Tribunal examined the definitions provided in Section 10B, the Special Economic Zones (SEZ) Act, 2005, and the Export-Import (EXIM) Policy. The SEZ Act includes blending in the definition of "manufacture."
- The Tribunal noted that the term "manufacture" in Section 10B was intended to include any process, as clarified by Circulars from the Central Board of Direct Taxes (CBDT).

2. Judicial Precedents:
- The Tribunal referred to the Supreme Court's decision in Chowgule & Co. Pvt. Ltd. v. Union of India, where blending of ore was considered "processing."
- The Tribunal also considered the Kerala High Court's decisions in Girnar Industries and Tata Tea Ltd., which held that blending and packaging of tea qualify as "manufacture" under Sections 10A and 10B.

3. Economic and Legal Context:
- The Tribunal emphasized the economic rationale behind Sections 10A and 10B, which aim to promote exports by providing tax incentives. The legislative intent was to include activities like blending within the scope of "manufacture" to encourage value addition and exports.

Conclusion:
The Tribunal concluded that blending and processing of tea result in a product with distinct characteristics and quality, qualifying as "manufacture" under Section 10B. The Tribunal held that the assessee is entitled to exemption under Section 10B for its 100% EOU engaged in blending and exporting tea.

Decision:
The Tribunal allowed the assessee's appeal, recognizing blending and processing of tea as "manufacture" for the purposes of Section 10B. The matter was remanded to the Division Bench to decide other related appeals in light of this principle.

Key Takeaway:
Blending and processing of tea, involving significant value addition and resulting in a product with distinct characteristics, qualify as "manufacture" under Section 10B of the Income-Tax Act, 1961.