9911796707
TMI Blog2011 (8) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is a manufacturer of moulds for ball pen and mould parts in Union Territory of Dadra and Nagar Haveli. Assessing Officer issued notices under sections 143(2) and 142(1) of the I. T. Act, 1961 (hereinafter referred to as "the Act") requiring assessee to submit books of account and other related details. In response to notices, assessee stated that it is a manufacturing unit and has claimed deduction u/s. 80-IB of the Act. It failed to produce details by stating that fire broke out in the office premises of Today's Writing Products Ltd and all records of assessee placed there were destroyed. It was stated that assessee HUF through Karta Shri Rajesh Kumar Drolia was one of the promoter/director of Today's Writing Products Ltd. No books of account were produced except few preliminary details and break up of various expenses to substantiate its claim of deduction u/s. 80-IB of the Act. Accordingly, Assessing Officer proceeded to complete assessment u/s.144 of the Act discussing facts that assessee HUF is engaged in manufacturing of moulds mainly supplied to main group concern namely Today's Writing Products Ltd. and M/s. Premium Writing Products. According to Assessing Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e repair and maintenance charges Total 80-IB claim Amount of 80-IB claim on job work income 03-04 Rs.52,49,200/- Rs.1,34,12,290/- Rs.73,08,307/- Rs.44,82,673/- 04-05 Rs.80,86,500/- Rs.1,11,63,660/- Rs.72,94,272/- Rs.43,94,985/- 05-06 Rs.98,10,000/- Rs.96,01,410/- Rs.53,58,756/- Rs.34,31,642/- He argued that repair and maintenance is not an ancillary activity of the assessee and perusal of assessment order for Asstt. Yr.2003-04 reveals that assessment was framed U/s.144 of the Act, as assessee did not produce books of accounts before AO and also did not submit the details as called for by AO u/s.142(1) of the Act. He referred to relevant observations of the A.O. for Asstt. Yr. 2003-04, which are as below:- "In response to Notice Shri Rajesh Singh, FCA and A/R of the assessee appeared and produced certain details. Assessee is a manufacturing unit claimed deduction u/s.8OIB. Therefore, a detail requisition was made for different particular related to manufacturing activities but Ld. A/R failed to produce such details. Above all no books of a/cs was produced before me for examination. Only a few preliminary details were produced on 07-12-2005 and thereafter, no compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that intermediate items produced by any manufacturing activity which are used as components by another manufacturer in producing the final product for the market is also an article or thing, the portion of which would entitle the producer for relevant deductions under the law. Whether the raw material is purchased by the appellant or supplied by the buyer of the product is not relevant for deciding whether the appellant manufactured an article or thing out of such materials purchased by itself or received from others, If it is job work, the profits of the manufacturer would to this extent be less than the profits in the case of manufacturing on its own. Therefore, such adjustments as are required in the case of job work manufacturing, is already done by the market conditions. The only question is whether the plastic mould amounts to manufacturing of article or thing. That the raw material is received from the purchaser is an irrelevant consideration. So also the fact that the product is purchased by the supplier of raw material. Hence it is held that the appellant produces an article or thing with entitlement to deductions claimed." He further argued that even Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up: Jai Durgcs Engineering Company is manufacturing Plastic Moulds & their components for writing instruments industries. Mould is heart of ballpen design & it is a creative job. A mould is not similar to another mould hence cost of each mould vary with other mould. The cost of mould depends of simplicity/ complexity of its design, size & number of cavity in each mould. The cost of I set of ballpen mould varies from Rs.8.00 lacs to Rs.20.00 lacs depending upon above criteria's. In manufacturing of a mould the basic raw material are various kinds of Iron & Steel, Tools, Jigs & almost 80% cost is that of labour payment. This is basically a techno-labour oriented job. Job work Manufacturing We are doing job work for those parties to whom we sold the moulds. Job work is basically manufacturing of mould parts which are needed regularly by those parties to keep the mould in running condition & get their production. We are doing the same from last 4-5 years and we are eligible to claim deduction u/s.801B and we got the same in the previous Assessment years from the department." Ld. CIT-DR, in view of above facts, argued that said job work is nothing but repairing and maintenance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be renewed by retreading but a different and distinct commodity cannot be said to have come into existence as a result of retreading and therefore, the business of retreading of tyres did not amount to production of a new article entitling assessee to relief U/s.80J and u/s.8OHH of the Act. According to him, this decision is squarely applicable to the case of assessee as the nature of job work in the case of this assessee is nothing but repairs and maintenance of moulds sold earlier. He stated facts that due to repairs and maintenance of old moulds, their life might be renewed and they might become useful for further use. But, the activity of repairing and maintenance brings no new article or thing, therefore, assessee is not eligible for deduction U/s.80-IB of the Act on such job charges. 5. Ld. CIT-DR further relied on the decision of Hon'ble Kerala High Court in the case of CIT v Vijaya Retreaders (2002) 253 ITR 53 (Ker), wherein it is held that there should be manufacture or production of a new article but retreading of tyres gives no new article and, therefore, it is held that assessee is not entitled for deduction U/s.80I of the Act. Further, he relied on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HH and 80I of the Act was the subject matter in the case of Honda SIEL Power Products Ltd. v CIT (2009) 318 ITR 309 (Delhi), wherein it is held that assessee is not entitled to deductions U/s. 80 HH and 80 I of the Act on profits from sale of imported machinery and spare parts used for providing after sales service. In view of the facts of present case and case laws above relied upon, Ld. CIT-DR stated that deduction U/s.801B of the Act will be available to assessee only if a new article comes into existence as a result of manufacture or production but in the present case, assessee is doing only repairs and maintenance of old moulds which were sold by him earlier in the garb of so-called job charges. According to him, as a result of repairs and maintenance, no new articles come into existence and it is neither manufactured nor production, therefore, it is not entitled for deduction U/s.80-IB of the Act, on the so-called job charges. Accordingly, he urged before us that the order of CIT(A) be reversed and that of the AO be restored. 7. On the other hand, the Ld. Counsel for the assessee stated facts that assessee is a manufacturer of moulds for ball pen and mould parts in the Unio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bush: For manufacturing of Guide bush EM24 steel are used & it is cut to the size of the guide bush with the help of special cutting machines. Then rough turning is done on it with the help of turning machines. Thereafter it is given for furnace hardening and hardening should be 58 as per Rockwell Hardening Scale. Thereafter cylindrical grinding surface grinding are done with the help of cylindrical & surface grinding machines. e) Hanging Pins/Link Rode : For manufacturing of Hanging pins nickel chrome steel are used & it is cut to the size of the hanging pins with the help of special cutting machines. Then rough turning is done on it with the help of turning machines. Thereafter it is given for vacuum hardening and hardening should be 44 as per Rockwell Hardening Scale. Thereafter cylindrical grinding, surface grinding are done with the help of cylindrical & surface grinding machines. f) Ejector Bush: For manufacturing of Ejector Bush H13 steel are used & it is cut to the size of the Ejector Bush with the help of special cutting machine. Then rough turning is done on it with the help of turning machines thereafter it is given for furnace hardening and hardening should be 46 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom facts. He stated facts that assessee provided after sales service to its valued customers, which is essential for selling moulds. After sales service is an exclusive service to its own customers and it is not that assessee carries on the business of doing repair. He argued that even if part of job work is after sales service, that is immaterial, because after-sale service is an indispensable part of manufacturing, almost universally, undertaken by manufacturers to maintain confidence and dependence of the users and to retain market of manufactured items. The Ld. Counsel for the assessee referred to the decision of Delhi Bench of ITAT in the case of ACIT v. Woodword Governors India (P) Ltd. (2007) 15 SOT 362 (Del), wherein it is held that the activity of after sale service is manufacturing activity and observed as under: 'In the instant case, the assessee company was engaged in manufacture, sale and servicing of industrial application electronic controls etc. On the profit earned by the industrial undertaking, the assessee claimed deduction under s. 80-IB. As per provisions of s. 80-IB, assessee is entitled to deduction in respect of profits and gains from certain industrial und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebugging after operation for a time involving the use of same machinery required for manufacturing, in such situation, repair is no different from manufacturing. He drew support from CIT v. Tamil Nadu Treatment Testing Services (P) Ltd. 238 ITR 529(Mad), wherein it is held therein that giving heat treatment to toughen the untreated crankshafts and forgings and castings for use in automobiles is manufacturing though there occurs no physical change through operations. Ld. Counsel for assessee argued that because of preponderance of judicial view of manufacture on own account and on job work as on a parity, revenue has raised this issue that job work indeed represents after sale repair work and contests the eligibility for exemption to the extent income represents income from such repair allegedly to pass off as job work. He argued that, of late, there has been a legislative development. Now a definition of the word "manufacture" which is determinant of issues in the case has been carved out and emergence of the definition alters the scenario. He stated that until recently nowhere in Section 80 IA or 80 IB of the Act and, for that matter, in the Act, no definition of the word 'manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that has inserted Section 10AA after Section 10A of the Act and Clause (iii) of Explanation 1 below sub-section (9) of Section 10AA contains the definition of "manufacture" by reference to Section 2(r) of the SEZ Act 2005. It reads: "manufacture" shall have the same meaning as assigned to it in clause (r) of Section 2 of the Special Economic Zones Act 2005. Thus it is incorporation of definition of "manufacture" in the SEZ Act and in turn in Exim Policy in the Act by reference. He further stated that besides Section 10AA of the Act, the SEZ Act 2005 also inserted Section 80IAB of the Act and thus SEZ Act has the elevation as a supplemental source of legislation in the Act and the two sections cited are creatures of wedlock between the two. In the light of the above, Ld. Counsel for the assessee argued that the work relating to "repair" finds place in definition of "manufacture" as adopted for the purpose of Section 10AA of the Act and it is for the first time that a definition of the word "manufacture" is available in the Act. According to him, this brings an end to the harrowing hunt for its meaning and, therefore, as a logical extension of presence of definition in the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertinence of the provisions of SEZ Act lies in demonstrating the kindred nature of the two provisions of the Act where both have as the presiding object the spread of the activity of manufacture and generation of economic activity in the areas where the same are most desired from welfare point of view and the nation's socio-economic enrichment. They both offer incentive to win over the entrepreneurs' skepticism about prospects of industry in such areas. The exemption or deduction of profit is meant to arouse motivation for entrepreneurs to divert their industrial ventures to such areas and thus, indisputably, the objects of special favours and situations calling for same analogy. He referred to Explanation defining "manufacture", which is prefaced by words "for the purpose of this section" i. e. section 10AA of the Act, but it dispels the ambiguity, uncertainty and confusion over the word used in other sections of the Act with object similar to that of section 10AA of the Act. The equation of objects makes the definition useful as a guide for the purpose of unlocking the mind of legislature with regard to the word occurring elsewhere in the Act. For this the Ld. Counsel for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l backwardness of the national economy. So, they are public interest provisions and fundamentally marked by a common trait of betterment of national economy. Ld. Counsel for the assessee finally relied on settled law that a provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of assessee and it should be so construed as to effectuate the object of legislature and not to defeat it. He relied on CIT Vs. Gwalior Rayon Silk Mfg. Co. Ltd. 196 ITR 149 (SC), Bajaj Tempo v. CIT 196 ITR 188(SC); CIT v. U. P. Cooperative Federation Ltd. 176 ITR 435(SC); Mysore Minerals v. CIT 239 ITR 775 (SC); Broach Distt. Cooperative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT, Ahmedabad 177 ITR 418(SC); CIT, Madras v. South Arcot District Cooperative Marketing Society Ltd. 176 ITR 117(SC); Amritsar v. Strawboard Manufacturing Co. Ltd. 177 ITR 431(SC); CIT Bombay and Others v. Mahindra and Mahindra Ltd. and Others 144 ITR 225(SC); CBDT v. Aditya V Birla 170 ITR 137(SC); CIT, Central-I Calcutta V. Birla Bros. Pvt. Ltd. 133 ITR 373(Cal); CIT v Salem Textiles Ltd 237 ITR 662(Mad); CIT, Tamil Nadu I v Simpson and Company 122 ITR 283(Mad); J.K.Abdul J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above cases assessees were not the manufacturers of tyres or retread rubber. They were purchasing retread rubber from tyre manufacturers and pasting the same on the worn tyres. As such they were not manufacturers. This decision is non- germane to the present issue. In view of this fact, he stated that repair in assessee's case is after-sale service as all manufacturers universally offer to their customers. He also distinguished case Relish Foods (supra) stating that it has been held that decapitating, dressing, deveining and freezing shrimps and prawns is no process of manufacturing or producing. This is also not relevant. Here the assessee is admittedly a manufacturer of ball pen moulds. The assessee undertakes repair of the moulds manufactured by it as after-sales service. He also distinguished another case cited by revenue of Gem India Manufacturing Co. (supra) where cutting and polishing diamond was held as not amounting to manufacture or production. This case is also not applicable to the assessee because the assessee is admittedly a manufacturer of moulds. The next case relied upon by the revenue is Liberty India (supra), wherein it has been held that the word derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit is derived from manufacturing activity only and as such is entitled to deduction u/s 80-IB of the Act on its entire income. So, whole dispute is superfluous. Moreover in view of settled principle of law to interpret provisions of deduction and exemptions or relief liberally, reasonably and in favour of assessee so as to effectuate the object of legislature and not to defeat it and in case of doubts the construction most beneficial or favourable to the assessee should be adopted even if it results in his obtaining a double advantage, the assessee should not be denied deduction u/s 80-IB of the Act on job work. 13. We have heard rival contentions and gone through facts and circumstances of the case. The admitted facts are that assessee is engaged in manufacturing of moulds and also carrying on repairs and maintenance of same moulds sold to buyers. The assessee's total receipt from job work charges including repairing and services are at Rs.96,01,410/-. The assessee claimed entire job work charges including repairing and services as deduction u/s. 80-IB of the Act and Assessing Officer disallowed deduction u/s. 80-IB of the Act from job work charges at Rs.16,05,356/- out of profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d districts extended up to 31st March, 2002.- 37.1 Under the existing provisions of section 80-IB of the Incometax Act, 1961, a deduction is allowed, in computing the taxable income, in respect of profits derived from a new industrial undertaking or the business of a hotel. '37.2 For encouraging industrialization in industrially backward States, the Finance Act, 1993, provided for a five year tax holiday for industrial undertakings set up in industrially backward States and Union Territories specified in the Eighth Schedule, which start manufacture or production during the period beginning on the 1st day of April, 1993, but before the 31st day of March, 2000. After the first five years, a deduction of 30 per cent of profits in the case of companies (25 per cent. in the case of other assessees) is allowed for the subsequent five years. Similarly, a five year tax holiday isavailable to undertakings set up in notified industrially backward districts of Category "A" and a three year tax holiday to those set up in industrially backward districts of Category "B", which begin manufacture or production after 1st October, 1994, but on or before 31st March, 2000. 37.3 The Finance Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andian Chemicals Ltd. Vs. CIT (2003) 262 ITR 278 reiterates this distinction and insist that only such business profit that have a direct nexus to the essential business activity of assessee, can qualify for deduction u/s. 80-HH of the Act. Hon'ble Apex Court in Pandian Chemicals Ltd. (supra), affirming the decision of Hon'ble Madras High Court in CIT Vs. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad), held as under: "The High Court rejected the submission of the appellant by relying upon the decision of this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, where this court had clearly stated that the expression "derived from" had a narrower connotation than the expression "attributable to" (page 93) : "In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor- General, it has used the expression 'derived from', as, for instance, in section 80J. In our view, since the expression of wider import, namely, 'attributable to', has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing any rule of interpretation as submitted by the appellant. In the circumstances of the case, we affirm the decision of the High Court and dismiss the appeal without any order as to costs." We find that Hon'ble Apex Court has considered its own decision in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) as well as the decision of Mrs. Bacha F. Guzdar (supra). And also of Raja Bahadur Kamakhya Narayan Singh (supra), wherein the definition of the word 'derived' was discussed and the same was reiterated by constitution bench of Hon'ble Apex Court in Mrs. Bacha F. Guzdar (supra). 14. We further find from the decision of Hon'ble Apex Court in the case of CIT Vs. Sterling Food (1999) 237 ITR 579(SC), wherein the issue was whether the income derived by assessee by sale of import entitlements was profit and gain derived from its industrial undertaking of processing sea food. Hon'ble Apex Court observed that the Division Bench of the High Court came to the conclusion that income which the assessee had made by selling the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts are not 'derived from refining of crude petroleum'. The refining of crude petroleum produces various products at different stages. Raw naphtha is one such stage. The further refining, or cracking, of raw naphtha results in the said products. The source of the said products is crude petroleum. The said products must therefore, be held to have been derived from crude petroleum." We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s repairs is one of the parameters of the expression manufacture, we have considered that the definition of manufacture has been bodily lifted into section 2(r) of the SEZ Act, 2005 w.e.f. 10.2.2006. We have gone through the provisions of section 10AA(9) and explanation (1) below section 10AA(9) of the Act and found that this explanation is for the purpose of this section only and it cannot be enlarged to other chapters of this Act. The relevant explanation (1) starts as under: "Explanation 1 - For the purposes of this section,- and relevant definition of 'manufacture' reads as under: (iii) 'manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005." From the arguments of Ld. Counsel for assessee it is clear that the Explanation 1, above referred, is for the purpose of this section only and it cannot be used elsewhere in the Act as section 10AA is a code in itself and it gives complete exemption to the income earned by units in SEZs. The income earned from units in SEZs do not form part of total income u/s. 10AA of the Act, whereas u/s. 80-IB of the Act the deduction is to be allowed where gross total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Reference made by Ld. Counsel for assessee of Woodword Governors India (P) Ltd. (supra) of Delhi Bench of ITAT, wherein Tribunal has allowed the claim by holding that the assessee company was also providing training to employees of its customers for the use of products sold to them and also providing after sales services and repairing of the products sold to its customers and accordingly, activities which are related activities of manufacture and sale of products are that of provision for training of the customers employees for being able to use the products and after sales service and repair. The Tribunal held that profits from these activities are indeed derived from industrial undertaking and formed part of manufacturing products. We are of the view that decision of Delhi Bench in the case of Woodword Governors India (P) Ltd. (supra) is not in term of the provisions of section 80-IB of the Act as after sale services and repairing of the products sold to its customers does not come within the purview of manufacture and also profit earned is not derived f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported machinery and spare parts but also charges for providing after sales services and Hon'ble Delhi High Court has negated the claim of assessee in terms of above. 18. Now we will conclude our decision in terms of the above as under: (i) That the assessee's case of repairing and maintenance charges are not at par with the income from manufacturing for the purposes of section 80-IB of the Act even though in section 10AA of the Act the definition of 'manufacture' has been bodily lifted into section 2(r) of SEZ Act, 2005 w.e.f. 10.02.2006, reason being the Explanation (1) prescribing definitions after subsection 9 of section 10AA clarifies that these definitions will apply for the purposes of this section only. Section 10AA of the Act being a code in itself, the definition incorporated from another Act cannot be applied to other provisions of the Act. Even otherwise, the income falling u/s. 10AA do not form part of total income whereas u/s. 80-IB of the Act only deduction from profits and gains derived from industrial undertaking is allowed and thus there is marked difference in these two provisions and definition of other section cannot be borrowed for allowance of deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, assessee is a manufacturing unit and has claimed deduction u/s. 80-IB of the Act on job work charges including repairs and maintenance. As stated by assessee, it failed to produce details as fire broke out in office premises of Today's Writing Products Ltd and all records of assessee placed there were destroyed. No books of account were produced except few preliminary details and break up of various expenses and accordingly, Assessing Officer completed assessment u/s. 144 of the Act by disallowing deduction claimed u/s. 80-IB of the Act job work charges including such repairs and maintenance by holding that maintenance of moulds which does not constitute manufacturing activity as it does not manufacture any article or thing and by this process no new article or thing comes into existence. In term of above that income earned from job work will qualify for deduction u/s. 80-IB of the Act but income from repairs and maintenance is not at par with income from manufacturing and will not qualify for deduction u/s. 80-IB of the Act. In view of above facts, the matter should have gone back to Assessing Officer to decide as to how much is job work charges and how much is rep ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
