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TMI Blog2007 (2) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... to these small scale undertakings who then manufactured the said products on a job-work for which they were paid processing charges. (c) The profits from the business of oil of olay and crest tartar control toothpaste constitute eligible business within the meaning of section 32AB(2)(i)(a) of the Income-tax Act, 1961. 2.1 The learned Commissioner of Income-tax (Appeals) has erred in not considering ground No. 2(d) contained in the memorandum of appeal filed before the Commissioner of Income-tax (Appeals), regarding allocation of operating and other expenses for the purposes of computation of deduction under sections 80HH and 80-I of the Income-tax Act in respect of profits of the Medak unit. He failed to appreciate and ought to have held that : (1) the learned Deputy Commissioner of Income-tax, in his order dated July 9, 1992, had erred in allocating all operating and other expenses to Medak unit pro rata on the basis of sale ; (2) the learned Deputy Commissioner of Income-tax had erred in not carrying out the direction contained in paragraph 9 of the order of the Commissioner of Income-tax (Appeals) dated July 10, 1992, in respect of allocation of operating and other expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chedule for the purpose of deduction under section 32AB of the Act. As regards the disallowances of 50 per cent. of interest from IDBI and other sources and also dividend, the Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. Subsequently vide order dated March 23, 1993, the Commissioner of Income-tax (Appeals) considered the report of the Assessing Officer and has held that the assessee is getting the items manufactured through outside parties by supplying raw materials and formulation under their own quality control and supervision. He held that the assessee is a manufacturer irrespective of whether it owned the plant and machinery or hired it from outside or through production of others. He thus held the assessee to be not eligible for deduction under section 32AB of the Act since the assessee is not a small scale unit and the SSI status of the ancillaries doing job work for the assessee is not relevant. Aggrieved, the assessee is in appeal before us. Learned counsel drew our attention to the provisions of section 32AB, according to which, a deduction is allowable on the investment deposit account of an assessee whose total income includes inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o these small scale industries who manufactured the said products on job work basis for which they were paid processing charges. According to him, the assessee only traded in these goods and therefore it would form part of the trading income eligible for deduction under section 32AB of the Act. To drive his point that the assessee is not a manufacturer of the said products, learned counsel drew our attention to the agreements dated September 14, 1988 and October 1, 1988, between the assessee and Snamp Pharma (P) Ltd. and M/s. Espi Industries (P) Ltd. respectively which are at pages 1 to 17 and 18 to 28 of the paper filed by the assessee. As per the agreements between the parties the assessee is the principal while the second party is the processor. As per article 1 of the agreement with Snamp Pharma (P) Ltd., the processor undertakes to process and package in his own plant toothpaste of such specifications and ingredients as are set out in the schedule thereto and referred to as the product and the principal shall furnish the processor full description and instructions concerning the methods, formulae and standards which are to be employed by the processor in the processing and pac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said production and therefore it cannot be said that the assessee was not the manufacturer of said goods. He also drew our attention to the agreements wherein the principals were the licence holders of the manufacturer of the said items. Thus according to him the assessee was not eligible for deduction under section 32AB of the Act. As regards the decisions relied upon by learned counsel for the assessee, the learned Departmental representative submitted that they all relate to central excise cases and as such these cases do not apply to the case on hand. Having heard both the parties and having considered their rival contentions, we find that undisputedly the oil of olay and crest tartar control toothpaste are the items mentioned in the Eleventh Schedule to the Act. According to the provisions of section 32AB, an industrial undertaking other than a small scale industry is prohibited from claiming a deduction under section 32AB if it manufactures or produces any items mentioned in the Eleventh Schedule. The assessee s argument has been that these items are manufactured by the small scale industries and the assessee is only a trader of these goods. The point for adjudication befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. Process in manufacture or in relation to manufacture implies not only the production but the various stages through which the raw material is subject to change by different operations. It was due to the cumulative effect of the other processes through which the raw material is subjected to, that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Therefore, the process is to be called a manufacture. Where the raw material is used in the first stage of the processing and the end product is the commodity which is saleable, the whole process is to be called a manufacture and the person is to be called a manufacturer. A manufacturer thus has to have some role and direction over each and every stage of the process. It is necessary that the goods should be manufactured under his direction and control or that there should be some financial involvement in the manufacture or production of the goods. Thus it is to be seen whether the assessee exercises any direction and control over the processing done by the small scale industries cited supra. The assessee has filed copies of the agreements with Snamp Pharm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aging materials necessary for the processing and packaging of the product and shall retain title in and to all such materials and the processor shall purchase all or some of the raw and packaging materials required for the processing of the product only on the request of the principal and the principal alone is responsible for claim of the said persons. Article 3 relates to the quality control and clause (b) mentions that the processor shall perform an analysis of each batch of the product processed hereunder as specified by the principal and the processor shall forward to the principal or its designee an agreed number of samples from batches together with its analytical report with respect thereto, for approval. It is also mentioned that the designee for the purpose of this clause may include the processor s own control manager provided it is expressly agreed to in writing by the principal. Clause (d) further provides that the processor may not object to the visits of the principal during regular business hours to inspect those areas of the processor's plant and/or warehouse which are devoted to the storage of raw materials, packaging materials, work-in-process and finished pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnology and shall not make any use of the manufacturing technology thereafter. Article 19 provides that the principal is not prohibited from manufacturing the product or getting the same manufactured or processed by other parties. The second agreement between the assessee and M/s. Espi Industries (P) Ltd. is at pages 18 to 28 for the manufacture of oil of olay. This agreement also contains similar articles except for an article providing for advancing of money and hypothecation of the material. From the contents of the above agreements, it is clear that the processing from stage one to the last stage is under the direction and control of the assessee-company. There is no bar to the assessee getting its product manufactured or processed by others, but it should have been entrusted to a person, who can be overseen by the assessee, so that it can be presumed that the assessee itself was engaged in manufacturing or processing. A decision in the same vein is reported in CIT v. Talwar Khuller (P.) Ltd. [1999] 235 ITR 70 (All). In the case on hand, the assessee not only provides the raw material and packaging material, but manifests each and every step of processing. As per the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the agreements there is a clear provision prohibiting the processing units from manufacturing or processing any other products similar to the products of the assessee except with the prior written approval of the assessee. Under the clause of termination of the agreement, it is provided that the principal shall exercise its right to remove all material and equipment within thirty days after determination. Thus, in effect, the assessee was controlling not only the work done but also the manner of doing the work. As the test of direction and control is proved, the assessee can be said to be the manufacturer. The assessee has entered into contract to get the goods processed according to its requirements and the quality control. In this view of the matter, we are inclined to agree with the findings of the Commissioner of Income-tax (Appeals) that the assessee is a manufacturer of the items mentioned in the Eleventh Schedule and hence makes the assessee ineligible for deduction under section 32AB of the Act. As regards the applicability of the decisions relied upon by learned counsel for the assessee, we are in agreement with the learned Departmental representative that they rela ..... X X X X Extracts X X X X X X X X Extracts X X X X
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