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TMI Blog2014 (1) TMI 1127X X X X Extracts X X X X X X X X Extracts X X X X ..... e state of Sikkim. Assessee electronically filed its return of income for AY 2007-08 on 21.10.2007 declaring total income of Rs Nil after claiming deduction of Rs. 3,03,68,280/- u/s 80IC. The case was selected for scrutiny and thereafter the assessment was finalised u/s 143(3) vide order dated 31.12.2009 and the total income was assessed at Rs 3,03,68,280/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) vide order dated 10.5.2010 allowed the appeal of the Assessee. Aggrieved by the aforesaid order of CIT(A), the Revenue is now in appeal before us and has raised the following effective ground:- 1. The ld. Commissioner of Income-tax(A)-XI, Ahmedabad has erred in law and on facts in deleting the disallowance made of Rs. 3,03,68,280/- claimed as deduction u/s. 80IC. 5. Assessee is a partnership firm constituted during the assessment year under review and has stated to have begun to manufacture of reactive dyes and chemicals at its unit located at village Manpur, Sikkim, a notified industrial area, in Sept 2006. During the course of assessment proceedings AO noticed that the entire net profit of Rs 3,03,68,283/- earned by the Assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing some amount of Sodium Chloride and Sodium Sulphate with the purchased reactive dyes. He further noted that even after blending or mixing of reactive dyes with different salts, the reactive dyes remain reactive dyes and accordingly it did not amount to manufacture or production of article or thing. AO further noticed that the entire sales of Rs 4.21 crores were made to 2 sister concerns namely Gujarat Dyes and Chemicals and M/s Colourstar Dyes and Chemicals situated at Tirupur, Tamilnadu. He thus after considering all the aforesaid factors concluded that the claim of Assessee of manufacturing and claim of deduction u/s 80IC was a colourable devise and accordingly disallowed the claim of the Assessee. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) after considering the submissions of the Assessee, allowed the claim of the Assessee by holding as under:- 3. As seen from the assessment order, the A.O. made various observations based on which the appellant was held to be not entitled to deduction u/s. 80 1C. Primary reason for holding so appears to be that the appellant is not engaged in manufacture or production of an article or thing. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yes. The appellant accepted that they are engaged in only mixing, grinding and blending of Reactive Dyes. In view of the Central Excise Tariff of India such an activity constitutes manufacture. The appellant deposited an amount of Rs. 17.39 lakhs with the Central Excise department, though the appellant is exempted from payment of Central Excise duty. The Central Excise duty deposited is to be refunded by the department on the winding up of business. The said amount is not debited to the trading account but is shown as an asset in the balance sheet. In view of the Supreme Court decision in the case of M/s. Arihant Tiles & Marbles (P) Ltd. (320 ITR 79), once an activity is taken to be manufacture for the purpose of Central Excise, it has to be accepted to be so for the purpose of Income tax also. Further to qualify for the deduction u/s. 80 1C, the activity need not be one of manufacture alone. Even production of an article or thing qualifies for the deduction. As held by the Supreme Court, the word production encompasses a larger area than manufacture. The assessment order is silent on the aspect as to why the activity of the appellant cannot be taken to be one of production (presum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high margin of G.P @ 71.38% and N.P @ 70.42% is attributable to the appellant being exempt from levy of Central Excise and VAT/CST which improves the profit margin by 21.14% ; sale consideration is higher in view of the longer period of credit of around 6 months allowed to the purchaser which results in increase in profit margin by around 5%; savings on account of there being no intermediariary between the appellant and the retailer, which results in increase in profit margin of around 25 to 30%; savings on account of transportation cost of materials sold by the appellant, which is borne by the purchaser; and economy in administrative expenses resulting in better profits. It is contended that these factors justify the G.P. @ 71.38% earned by the appellant. Besides, the Ld. AR furnished the trading results of the sister concern M/s. Colourstar Dyes & Chemicals. As seen from the details furnished, the G.P. of the sister concern in the assessment year 2006-07 (the appellant firm was not in existence in this year) was @ 4.80%. As against this in the year under consideration i.e. A.Y. 2007-08 its G.P. was 4.85 % and in the A.Y. 2008-09 it was 4.83%. Thus it is contended by the Ld. A.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the same I am inclined to accept the contentions of the appellant and I am of the view that no adverse view can be taken. 4.5 Accordingly, I hold that the disallowance of deduction u/s. 80IC is not warranted. It is deleted. These grounds of appeal are allowed. 6. Aggrieved by the order of CIT(A), the Revenue is now in appeal before us. 7. Before us Ld. D.R. pointed to the findings of AO and submitted that Assessee has achieved a huge turnover in a very short period of two and half months. The Ld.D.R. further submitted that the activities done by the Assessee at Manpur factory was nothing but simply processing of reactive dyes by mixing some amount of Sodium Chloride and Sodium Sulphate with the purchased reactive dyes which was also been proved by statement recorded of the purchase parties. He further submitted that Assessee has not brought on record as to whether any chemical reaction takes place in the manufacturing process. He further submitted that the activity of blending of different types of reactive dyes does not results into production of a commodity having different chemical characteristics and therefore the activity cannot be considered as manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same activity as not a manufacturing activity. For this proposition he relied on the decision of Apex Court in the case of ITO Vs Arihant Tiles and Marbles (P) Ltd (2010) 320 ITR 79. 9. With respect to justification of higher margin of profit earned by the Assessee, the ld. A.R. submitted that it was due to various factors namely, the Assessee was enjoying exemption levy of Central Excise (being 16.48%) and VAT/CST (effective rate being 4.66%) and thus the additional profit margin was around 21.14%, allowing longer credit period of around 6 months instead of normal credit period of 60 to 90 days and therefore to cover the notional cost of finance extra price was charged which translated to around 5%, Assessee was selling directly to the retailer and thus avoiding the middlemen and other intermediates which resulted into saving of around 25 to 30%, the transportation cost was borne by the retailer which also resulted into saving to the Assessee. It was further submitted that the Assessee operated on a low profile and thus maintained administrative and running expenses economically which also translated into higher margins. 10. With respect to the report of the Inspector which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts or dilutents into standardised forms ready for use in the process of dyeing amounts to "manufacture". On the other hand as per the Revenue, the activity of assessee is grinding and mixing of different reactive dyes with different salts and there is no material on record to show that the new commodity that comes into existence has different chemical properties and after the manufacturing process, the final product is substantially different from that of the original ingredients. Before us, the Ld.A.R has submitted that once the activity of assessee is considered to be a manufacturing activity by the Excise authority, it would be incorrect on the part of Income tax to consider the activity as not manufacturing and thus take a different view. 12. We find that section 2 (29BA) was inserted by Finance (No 2) Act, 2009 with effect from 1.4.2009 which defines manufacture as under:- "manufacture" with its grammatical variations, means a change in a non living physical object or article or thing - (a) Resulting into transformation of the object or article or thing into a new and distinct object or article or thing into a new and distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty even if they do not fulfil strict criteria of a manufacturing process but for the purpose of Income-tax we have to find out whether the product meets the test of manufacturing activity particularly in a case like this in which the assessee is not even paying excise duty..." 14. We also find that in the case of Aartech Solonics Ltd, vs. CIT (2013) 256 CTR (MP) 293, the issue before the H'ble High Court was whether the manufacturing of Advanced Microprocessor based Fast Bus Transfer Scheme Panel was a manufacturing process or assembling process? The Hon. High Court has observed as under:- "5.It appears that both authorities have not considered the process for manufacture of the product. The CIT (Appeal) had considered the matter in a different aspect while the Tribunal had looked into the expenditure aspect and also in respect of the employment of certain persons. The Tribunal was of the opinion that without assistance of the technical persons, no such product could have been manufactured, while finding of the CIT (Appeal) was based entirely on a different footing but the fact remains that none of the authorities had considered how product namely Fast Bus Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before it, when the matter was before the Assessing Officer, such process was not followed. Even before the Tribunal, though such issue was raised but the Tribunal had considered the matter in a different perspective and turned down the case of the assessee merely on the grounds that there was no adequate expenditure in the process of manufacturing of the aforesaid product and the persons who were employed were not technical. The Tribunal had only considered that on perusal of the receipts, the expenditure was very low and the profit was high. On these grounds, the order of CIT (Appeal) was turned down by the Tribunal. In our considered opinion, in view of the law laid down by the Apex Court in aforesaid three judgments, we find it appropriate that the matter ought to have been examined by the Assessing Officer through the assistance of technical person or a committee of technical persons, if available in the department, but it appears that such process was not followed and the product of the appellant was not found to be manufactured. Though the CIT (Appeal) had found that it was a manufacturing process, but the Tribunal has turned it down. In view of aforesaid, we find it approp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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