2020 (10) TMI 426 - HC - Income Tax

Deduction u/s 10AA - CIT(A) concluded that the process done by the assessee would qualify as 'manufacture', under the SEZ Act - Tribunal following that the activity of the assessee of purchasing illuminate and removing dust from it and selling the dust removed illuminate amounts to 'manufacture', when Clause(r) of Section 2 of the special Ezonomic Zones Act, 2005 defines 'manufacture' otherwise and that the assessee is eligible for deduction under Section 10AA - HELD THAT - Semi finished material purchased by the assessee is not marketable and usable in the industry, as what is purchased by the assessee includes silicon, sand and waste, which cannot be marketed as such, unless the waste materials are removed. The flow chart, which was produced by the assessee before the AO was referred to CIT(A) and he came to the conclusion that the Assessing Officer was himself mislead by the nomenclature used in the Gate Pass. Revenue carried the matter by way of appeal to the tribunal and the tribunal once again re-appreciated the factual position and found that there is a process of 'manufacture' as defined under the SEZ Act, which takes place in the SEZ unit and also pointed out that the AO himself has accepted that the assessee's unit, processed the raw materials by removing 10 to 20% impurities. Cost comparison of the semi finished product with that of the raw material was also referred to and it was also pointed out that the Assessing Officer could not establish that the assessee has suppressed the purchase cost of semi-finished goods in order to claim higher deduction under Section 10AA of the Act. Certificate issued by the Assistant Development Officer was accepted on the ground that the revenue could not prove the same to be not genuine. Tribunal sustained the factual finding recorded by the CIT(A). Entire factual matrix has not only been analyzed by the CIT(A), but, also by the tribunal. Substantial Question of Law is answered against the Revenue.

Summary

Issues:
1. Interpretation of the term 'manufacture' under Section 10AA of the Income Tax Act, 1961.
2. Eligibility of the assessee for deduction under Section 10AA.
3. Assessment of manufacturing activity in a Special Economic Zone (SEZ) unit.

Issue 1: Interpretation of the term 'manufacture' under Section 10AA:
The High Court considered whether the activity of purchasing illuminate, removing dust from it, and selling the dust removed illuminate amounts to 'manufacture' as per Section 2(r) of the Special Economic Zones Act, 2005. The Court analyzed the process undertaken by the assessee in their SEZ unit to determine if it qualifies as 'manufacture' for the purpose of claiming deductions under Section 10AA. The Court referred to a previous case where a similar question of law was decided against the revenue, indicating a consistent interpretation of the term 'manufacture' in such scenarios.

Issue 2: Eligibility of the assessee for deduction under Section 10AA:
The Court reviewed the assessment year 2013-14 where the Assessing Officer rejected the claim of the assessee for deduction under Section 10AA, stating that there was no manufacturing activity in the SEZ unit. However, the Commissioner of Income Tax (Appeals) allowed the appeal, considering the processes carried out by the assessee as resulting in a new product with a distinctive name, character, or use, as required by the SEZ Act. The Court observed that the CIT(A) accepted the submission of the assessee that the process undertaken qualified as 'manufacture' under the SEZ Act, leading to the eligibility for deduction under Section 10AA.

Issue 3: Assessment of manufacturing activity in SEZ unit:
The Court delved into the details of the process adopted by the assessee in their SEZ unit, examining the raw materials used and the transformation process involved. The Assessing Officer initially denied the deduction, citing that the imported and exported products were the same, indicating no manufacturing activity. However, the CIT(A) and the tribunal found that there was indeed a manufacturing process taking place in the SEZ unit, supported by evidence such as a certificate from the Assistant Development Officer and a detailed explanation of the production process provided by the assessee. The tribunal upheld the factual findings of the CIT(A), emphasizing that the process undertaken by the assessee qualified as 'manufacture' under the SEZ Act, warranting the eligibility for deduction under Section 10AA.

In conclusion, the High Court dismissed the present Tax Case Appeal, aligning with the previous decision and answering the substantial question of law against the Revenue. The judgment emphasizes the factual analysis conducted by the CIT(A) and the tribunal, highlighting the absence of any substantial question of law for consideration in the appeal.