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TMI Blog2011 (3) TMI 1667X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction u/s 80IB involved is ₹ 11,38,060/-. It was not allowed by the AO but was allowed by the learned CIT(A) and therefore, the Revenue is in appeal before us. 2.4 Similarly, in the AY 2003-04, the amount of deduction involved is ₹ 89,66,192/-. It was not allowed by the AO but was allowed by the learned CIT(A) and the Revenue has preferred an appeal. 2.5 In the AY 2004-05, the learned CIT(A) allowed deduction u/s 80IB to the tune of ₹ 3,54,93,137/- for Silvassa Unit and of ₹ 26,11,119/- for Daman Unit but restricted it to gross total income of ₹ 2,43,23,939/-. 2.6 In the AY 2005-06, the amount of deduction allowed by the learned CIT(A) is ₹ 14,85,74,625/-. There are other issues involved in the appeal in this year. Hence, they will be considered separately in the following paragraphs. 3 The lead year is Asst. Year 2003-04 where the AO has carried out investigation and written a detailed order which has become the basis for assessment in other years. Therefore, we will take up for discussion Assessment Year 2003-04. The grounds raised by the Revenue in all the assessment years except AY 2005-06 are the same except amount of deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. Vs. CIT(217 ITR 849 (Kar)- whereby the Hon'ble Karnataka High Court held that jron ore sizing and washing plant used in washing the impurities from iron ore and sizing the same is not manufacturing or production. (e) CIT Vs. Lucky Mineral Pvt. Lt. (226 ITR 245(Raj) - whereby the Rajasthan High Court held that mining of limestone and marble blocks and cutting and sizing of the same does amount to manufacture or production as the marble stone retains a continuing substantial identity. The said decision of Hon'ble Rajasthan High Court stands confirmed by the Hon'ble Supreme Court in the case of Lucy Minmat (P) Ltd Vs. CIT as reported in 245 ITR 830 (SC). (f) CIT Vs. Premier General Traders (P) Ltd(242 ITR 654(Bom)-whereby the Bombay High Court has held that grinding of soap stones and minerals cannot be regarded as manufacture of article or thing. (g) CIT Vs. Computer Graphics Ltd(285 ITR 84 (Mad)- whereby the Madras High Court has held that cutting of jumbo rolls of graphic colour paper into marketable size by the process of slitting neither amounts to manufacture nor production. (h) CIT Vs. Sri Meenakshi Asphalts (266 ITR 626(Mad) - whereby the Madras High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta 66 ITD 441 (Chandigarh ITAT). 12. DCIT Vs. Bhogilal A\ulchand Kandoi 96 ITD 344 (A'bad ITAT). 13. ACIT Vs. Rameshchandra R. Patel 89 ITD 203 (A'bad 3rd Mem). 14. H. V. Venugopal Chettiar Vs. CIT 153 ITR 376 (Mad) 15. Hiralal Maganlal a Co. Vs. DCIT 96 ITD 113 (Mum). The Ld. CIT(A) has erred in not appreciating that the statements were backed by independent evidence. As per per assessee's submission dated 16.3.2006, iron scrap is purchased directly directly by the Ahmedabad Unit. However, iron scrap is claimed to be needed for the production of the main product Ferro Moly and is stated to be one of the ingredients required for the pilot process which determines the product mix which is communicated in the job order to the Ahmedabad Uni.t It is for the assessee to explain as to how the pilot process is conducted at Silvassa in the absence of iron scrap. The closing stock of the Silvassa Unit does not reflect any chemicals which could have been used for testing of raw material. Also unloading and sampling of each batch of raw material and re-loading for dispatch to Ahmedabad would curtail loading / unloading charges. No such charges are debited in the Silvassa Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced to 30% from earlier available at 100% and therefore, the assessee opened another unit at Daman which was eligible for 100% deduction. This led the AO to have suspicion that no manufacturing activity as such is being carried out at Silvassa Unit or Daman Unit and they are only make-belief affair. In order to find out the truth, the AO carried out survey u/s 133A of the Act at all the three premises, i.e. at Silvassa, Ahmedabad and Daman Units on 17-01-2006. During the course of survey proceedings, the AO had recorded the statements of various persons on oath. From the material gathered during survey operation, the AO inferred that no manufacturing or production of any article or thing is carried out at two places, viz., Silvassa and Daman Units except occasionally crushing and grinding of the final product, with the help of one jaw crusher and two grinding machines and engaging few workers for sizing and sieving. The basis for arriving at this inference has been discussed by the AO in detail in the subsequent paragraphs in his order. This basis / reasoning are further summarized as under:- [a] Shri Sachchidanand Jha, the main person who was controlling the affairs of Daman Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abad Unit and increasing the profit of Silvassa Unit for claiming the benefit of deduction u/s 80IB of the Act. He listed such common expenses shifted to Ahmedabad Unit, as under:- (a) Salary / Wages (b) Contribution to PF, ESI Scheme (c) P.F. Admn. Expenses (d) Managing Director's remuneration (e) Commission on sale (f) Books and periodicals (g) Computer expenses (h) L.C. opening charges (i) Interest payments to directors and others, etc. 5.5 In response to the above show cause notice, the assessee explained that - (i) Substantial manufacturing process and decision making are done at Silvassa Unit which brings value addition to the product; (ii) Only the process of melting is carried out at Ahmedabad and rest of process is done at Silvassa and Daman Units; (iii) This was done as the authorities in Silvassa did not allow the melting process to be carried out there; (iv) Ultimate responsibility of supply of material to the satisfaction of the customers is of Silvassa Unit; (v) The details of plant and machinery installed and used in Silvassa Unit are given in the Annexure to the reply; (vi) Merely because the Directors are residing at Ahmedabad, it cannot be inferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting To be analyzed to match with the order specifications and standard specificat ion Laboratory - Oven, Hot plate and Electrical Balance. Glassware and chemical 7 Silvassa Packing Finished goods graded physically and chemically tested packed as per customer requirement Sieving decks Laboratory 6. The AO did not accept the contentions of the assessee that substantial part of the process during the course of manufacturing were carried out at Silvassa Unit, for the following reasons:- [1] The documents for procuring Molybdenum Ore which constitute 90% of the cost of production is only imported in the name of Silvassa Unit but in reality they were delivered at Ahmedabad Unit. [2] The documents showing procurement of Ore do not prove that the raw materials were imported, transported and unloaded at Silvassa Unit. The AO relied on the statement of Shri Adarsg Jhaveri, Director to the effect that only grinding, crushing and sizing is done at Silvassa Unit. [3] Shri Atul D Patel had stated that the Director of the company gives the order for purchase of raw material. [4] The remuneration of Directors are debited in the accounts of Ahmedabad Unit only and not a single penny is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erials or of final product, large number of agents, viz., Sulphuric Acid, Hydrochloric Acid or other regents are required and for chemical analysis, electronic instruments are also needed. The survey at Silvassa did not indicate that assessee had purchased any such chemical agents or instruments required for chemical analysis. A vessel for melting Molybdenum di sulphide for converting into Molybdenum tri sulphide at a temperature of 400 degree cel. is required but no such vessel was found. 7 Thereafter, the AO referred to various authorities for the proposition that the process carried out by the assessee is not manufacturing. Some of these authorities referred to by the AO are as under:- (i) Banner & Co. v. Union of India, (1994) 70 ELT 181 (Cal) [putting brand name on specified goods does not change the goods and cannot, therefore, amount to manufacture]. (ii) Collector of Central Excise v. Bakelite Hylam Ltd., (1997) 1OSCC 350,361-62 [cutting industrial laminated sheets (paper based) and glass epoxy laminated sheets into requisite size and punching holes for making them capable of being fitted as insulators, does not amount to manufacture]. Manufacture Sec. 28 1333 (iv) Col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucky Mineral (P) Ltd. vs. CIT (2001) 116 Taxman 1 (SC). 8. The other judgments relied on by the AO are as under :- 1. Titaner Component Ltd. 72 ITD 514(Delhi) Coating of metal is not manufacturing of articles of things. 2. Pink-Star Vs. DCIT 72 ITD 137(Mumbai) cutting and polishing of diamond is not manufacturing and 80I is not available to the assessee for these activities. 3. Liberty group marketing Division v/s. ACIT, 61 TTJ 566 (Delhi) - getting shoes manufactured from cobblers cannot be called manufacturing. 4. Shaw Scot Distilleries (P) Ltd. v/s. AOT 76 ITD 89(SB (Kolkotta) Production of IMFL & packing is not amounting to manufacture of art icles of things. 5. ACIT v/s. GTC Enterprise 87 ITD 188(Chennai) - making of small quartz from large is not manufacture of article or things. 6. Printing ~of manufactures' name on capsules is not manufacturing of articles or things. CIT vs. Western India Pharma - 248 ITR 96 (Bom) 7. Plant installed for sizing and washing iron are not entitled to deduction u/s 80I since articles or things were not manufactured. - V M Salgoankar Bros. (---) Ltd. vs. CIT, 217 ITR 849 (Karnataka) 8. Process of Galvasing is not manufacture 128 ITR 472 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Silvassa the process of converting it into molly slab is carried out at Ahmedabad. The appellant is required to carry out this process at Ahmedabad for the reason that this process creates huge heat and it also produces some toxic gases which cause pollution. The local authority of Silvassa on account of this pollution problem has given permission of production of final product by crushing and grinding of slabs only at Silvassa. Thus for this reason the Silvassa unit has got its part of the process carried out at Ahmedabad on job basis at Alimedabad. At Ahmedabad unit other materials like ferro, silica, aluminium powder, iron scrap are added to the raw material i.e. Molly ore and melting of metal is carried out in vessels. As it is an exothermic process, substantial heat is generated and no external heat is supplied. Chemical reaction takes place between different raw materials in the melting process at Ahmedabad unit. Thereafter the material is allowed to cool naturally and slabs weighing 300 kgs to 400 kgs and about 3 ft. diameters are produced at Ahmedabad unit, which are then sent to Silvassa and crushed into different sizes. Thus at Ahmedabad semi finished product is obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cone crasher, grinder, genset and lab equipment at Silvassa unit. 13.3 In so far as the use of power is concerned, the appellant has given details that it has purchased LDO which has been used for running genset for operating machinery and that it has also got three phase power line. The appellant has produced evidence that meter was not functioning properly and that therefore it had time and again made complaint to the Electricity Authority. This fact was verified in remand proceedings by the A.O. with the electricity authorities. The transfer of LDO to Silvassa is supported by L.R. which has also been verified with the supplier of LDO and the transport company by the A.O. in the remand proceedings. 13.4 Thus the adverse observations of the AO with reference to the above issues have been properly explained and the same have been verified in the remand proceedings. In the circumstances, merely on the basis of statement of one person or two persons one cannot conclude that the Silvassa unit of the appellant was not carrying out manufacturing activity and that the entire manufacturing was carried out at Ahmedabad and that the final product was also produced at Ahmedabad. All these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is recognized in the trade as a new and distinct commodity i.e. the name, use and character of the end product should be different. In the case of the appellant the final product is called ferro molly, Molly di suphide which has been brought about by changes in the chemical composition of the original commodity i.e. molybdenum, therefore, it is definitely a process of manufacturing. The final product produced at Silvassa unit is known in the trade as a distinct commodity and has a separate market. The appellant has got machineries at Silvassa in the form of jaw crusher, grinder and sieving machine . Considering these aspects, I hold-that the A.O. was not justified in rejecting the claim of deduction u/s. 80-IB. 13.6 On this issue I further observe that the Assessing Officer has made remarks about accounting of expenses at Ahmedabad. On this issue in the course of assessment proceedings before the A.O. as required by him the appellant had famished "revised working of accounts by allocating the expenses in the ratio of turnover of Ahmedabad unit and Silvassa unit and on that basis worked out the net profit of both the units separately. In this working the appellant had also co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In brief, the learned DR submitted the following arguments:- [1] The entire production as such of FMA was made at Ahmedabad but no profit is shown at Ahmedabad. As entire production is shown at Silvassa Unit, it shows the intention of the assessee to transfer entire profits to Silvassa Unit for claiming the deduction u/s 80IB of the Act. Thus, there is diversion of profits from Ahmedabad Unit to Silvassa Unit. In fact, Silvassa Unit is a disguise to take an undue benefit under the Act. As Silvassa situated in a backward area as per VIIIth Schedule it has enabled the assessee to claim such deduction. The intention of the assessee is further clear from the fact that when the deduction available to Silvassa Unit was reduced to 30%, then it opened another unit at Daman. Salaries of the important persons are drawn from Ahmedabad Unit. There is no evidence with the learned CIT(A) in support of his findings. [2] Whether it is slab, chips, powder or lump, they are all ferro molybdenum alloy and there is no difference in composition except change in physical sizes. This will not amount to manufacturing. [3] No testing is done at Silvassa Unit as there is no contemporary record showing wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mad) - wherein the Hon'ble Madras High Court held that extraction of granite from hills, blasting the same into granite block involves only a process of cutting or removing part of larger mass, it is not an activity which can properly be regarded as manufacture or production. (b) CIT Vs. Natraj Processing Industries (203 ITR 833 (Pat)- wherein the Hon'ble Patna High Court held that calendaring_of grey cloth is only a process to give a temporary finish by pressing the fabric for making it marketable without bringing any lasting change and the same does not amount to manufacturing. (c) CIT Vs. Hindustan Metal Refining Works (P) Ltd (128 ITR 472(Cal)- wherein the Calcutta High Court held that the galvanizing work of coating iron or steel with zinc to prevent rust does not amount to manufacture or production of new goods. (d) V. M. Salgaocar Bros.(P) Ltd. Vs. CIT(217 ITR 849 (Kar)- wherein the Hon'ble Karnataka High Court held that washing the impurities from iron ore and sizing the same is not manufacturing or production. (e) CIT Vs. Lucky Mineral Pvt. Lt. (226 ITR 245(Raj) - wherein the Hon. Rajasthan High Court held that mining of limestone and marble blocks and cut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct. On the basis of testing, instructions are to sent to Ahmedabad Unit along with the raw material. [B] Melting activities are prohibited at Silvassa because they create heat at a high temperature of 1800 degree cel. It has been so given in writing by the Pollution Department of Union Territories of Dadra & NH. Therefore, melting process is carried out at Ahmedabad. [C] Only the permission granted for Silvassa Unit is for breaking, crushing and sizing of slabs only. [D] After melting at Ahmedabad Unit, the slabs are sent to Silvassa where they are broken, crushed, grinded and sieved. [E] When melted in slabs, FMA is never homogeneous and chemically it varies at different height of the slabs. [F] The material is sorted, analyzed, packed and supplied to the industries as per customer's specifications. Different customers require material with different percentage of iron and Molybdenum. Steel companies require lumps of particular size. The casting units require chips and Electrode Industries require powder of different mesh sizes. [G] Thus, manufacturing activity done is at Silvassa and only job work is done at Ahmedabad. [H] Silvassa Unit has a full fledged laboratory an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufacturing process carried out by the clients would be different. Thus, lumps, granules or powder are chemically tested to suit the customers and to understand molybdenum contained in the material . [Q] It is incorrect on the part of the AO and the learned DR that the new machineries were not purchased at Silvassa. The learned AR referred to copy of transport receipts and purchase vouchers. The claim of the AO that there were (7) seven workers and not (10) ten or more, is incorrect because the AO has ignored to count production chemist, production supervisor and production manager who should also be counted as workers. In addition to this, casual workers were also employed. All these workers are el igible for PF benefits and details thereof were furnished to the learned CIT(A). [P] There is no intention to show loss at Ahmedabad Unit and higher profit at Silvassa Unit. The allocation of expenses has been done on the basis of turnover which has been found by the learned CIT(A). 11.1 Regarding the existence of laboratory, the learned AR submitted that the assessee had full fledged laboratory for its testing. Necessary proof in the form of L.R. of transportation of equipment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uyers as to the contents of Molybdenum sold to them in the form of lumps, granules or powder but he could not produce or show any register in which record of such testing is made having the signature of the person who has tested the material and also the results of such testing. 11.5 The certificates did not indicate as to where such testing was carried out. It was also not explained how the proportion of molybdenum or iron in a particular sample was found. If melting is required to be carried out even for testing then how the high temperature for such melting was achieved and what were the instruments which determine the percentage of molybdenum / iron, in a sample. 11.6 (i) The learned AR referred to various documents from his paper book. Page 350 was a letter from Administration of Dadra and Nagar Haveli, U.T., (Department of Industry) District Industries Centre regarding Renewal of PMP SSI Registration. It indicated that the assessee will manufacture FERRO MOLYBDENUM, MOLYBDENUM DI SULPHIDE (BY CRUSHING AND GRINDING ONLY). (ii) Page 603 is a letter dated 28-08-2006 from the Office of the Pollution Control Committee, Silvassa which indicated that melting activity is not permi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n these activities including laboratory testing and grinding and crushing would constitute manufacturing, he referred to the following judgments:- (i) Computers Graphics Ltd. vs. CIT (2009) 308 ITR 98 (SC) (ii) CIT vs. Prabhudas Kishordas Tobacco Products (P) Ltd. 282 ITR 568 (Guj) (iii) Paul Mathew & Sons vs. CIT (2003) 263 ITR 101 (Kerala) (iv) CIT vs. S Khadir Khan Sons (2008) 300 ITR 157 (Mad) (v) ITO vs. 327 ITR 497 (Chhatisgarh) (vi) 97 ITD 361 (ITAT) (Ahd) (vii) 328 ITR 384 (viii) 107 ITR 195 (ix) 108 ITR 367 (x) Liberty India vs. (2009) 317 ITR 218 (SC) (xi) CIT vs. Sport King India Ltd. (2010) 324 ITR 283 (Delhi) (xii) M/s Subhalachal Print & Pack vs. ACIT [ITA No.2128/Ahd/2007, order dated 16-12-2009] 11.8 Following judgments were also referred to by ld. AR:- (1) Vijay Ship Breaking Ltd. vs. CIT (2008) 314 ITR 309 (SC) (2) M/s Kores India Ltd. vs. CIT (2004)-(174)-ELT-0007-SC (3) India Cine Agencies vs. CIT 308 ITR 98 (SC) (4) ITO vs. Arihant Tiles & Marbles P. Ltd. 320 ITR 79 (SC) (5) CIT vs. Best Chem & Limestone Industries P. Ltd. (1994) 210 ITR 883 (6) Lucky Minmat P. Ltd. (2000) 245 ITR 830 (SC) (7) D J Stone Crusher vs. CIT (2010) 229 CTR 195 (HP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act. The ld. DR referred to Ujagar Prints vs. Union of India & Others (1989) 179 ITR 317 (SC) for highlighting the definition of manufacture as per Central Excise & Salt Act, 1944 which was later followed by Hon. Kerala High Court in CIT vs. Kanam Latex Industries (P) Ltd. (1993) 203 ITR 542 (Ker) wherein it is held that to find out whether there is manufacture is to find out whether the change or series of changes brought about by the application of processes take the commodity to point where commercially, it can no longer be regarded as original commodity but is instead, recognized as a distinct and new article that has emerged as a result of the processes. He then referred to the decision of Hon. Kerala High Court in CIT vs. Oceanic Products Exports Co. (1996) 213 ITR 293 (Ker) wherein also similar view about concept of manufacture was propounded. Next reference made by the ld. DR in the rejoinder was two judgments of Hon. Kerala High Court in CIT vs. Kanam Latex Industries (P) Ltd. (1996) 221 ITR 1 (Ker) and of Hon. Madras High Court in CIT vs. Sacs Eagles Chicory (2000) 241 ITR 319 (Mad) wherein also similar view was taken that after series of processes if original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent marketable commodity it would amount to manufacturing but where commodity resulted into same commodity as in the present case, it will not amount to manufacture. The ld. DR submitted that the documents referred to by the ld. AR in the Paper Book about alleged laboratory testing are not in fact dated and they do not reflect as to whether such testing was done. For carrying out testing assessee should preserve equivalent samples of the item which was tested so that in the event of dispute the parallel samples could be produced in the court of law. Without there being the parallel samples available and without there being basic register showing what testing has been done and how it was done, what process was deployed, who has done it, then in absence of such record, it cannot be said that assessee had carried out any laboratory testing of the material. For the sake of argument it is presumed that even if laboratory testing is carried it does not mean that it was a part of manufacturing process. It can at best be preparation for manufacturing process which was only done at Ahmedabad. Thus assessee had no contemporary record of alleged laboratory testing at Silvassa. There are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elt and mix in a vessel. The vessels for manufacturing of FeMo Alloy are available at the main factory at Ahmedabad. It is undisputed fact that there is no such vessel(s) at Silvasa or Daman. Moly Di Sulphide is produced in a kiln at Ahmedabad factory. It is not the claim of the assessee at any stage of the proceedings that these vessels, kilns are available at Silvasa / Daman units. 3. The stand of the assessee had been that "FeMo Alloy Slab" manufactured at Ahmedabad is a semi finished product, which is input material to 1he Sllvasa/Daman unit. In Silvasa/Daman unit, the FeMo Slab/cake is broken into lumps, chips and powder using jaw crusher and sieves and dispatched to customers as per requirement. It is also the stand of the assessee that raw materials are purchased in the name of Silvassa / Daman unit sampling and at Silvasa / Daman, the trial batches are tested at Silvasa/Daman and results are intimated to Ahmedabad for job work of production of FeMo for which job work charges of ₹ 5/- per kg. were paid. 4. Departments stand is that the assessee has created a 'make up at Silvasa / Daman by hiring small premises to utilize the provisions of 80IB where as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces a survey u/s.133A was concluded on 17.01,2006. During the survey at factory at Amraiwadi [Ahmedabad], Bavla, Head, office and at Daman (Silvasa unit was closed on the date of survey) evidences were gathered, statements were recorded from the primary persons who were handling the factory at Ahmedobad and Daman, and also the laborers including Shri Adarsh Zaveri, the Director of the company. Photographs of Daman factory were token. Based on the evidences collected, statements recorded, after giving opportunity assessment 9 During the assessments following issues arose and the arguments of the assessee company are as under. 1. There are 10 or more than 10 workers at Sllvasa / Daman unit. 2. There was lab at Silvasa / Daman where sampling and testing done by lob technician. Batch trials were made for each imported back of raw material and the results of batch trial tests were informed to Ahmedabad unit for job work. 3. Purchases were made by Silvassa / Daman units and dispatches/sales were also made from there. 4. Crushing and grinding of FeMo slab took place at Silvasa / Daman using the jaw crusher, grinder, sieves etc. to suit the requirements of customers. 5. FeMo Lumps, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata of Lab Technician (submitted by assessee in Paper book) does not prove actual existence of Lab and conducting of tests, in the face of facts found. (6) Shri Adarsh Zaveri who is Director, overall incharge of operations stated that he does not know whether material is unloaded and loaded at Silvasa/Daman, how samples are taken (statement Q.15). (7) Most importantly, quality control lab requires certain records to be maintained. During survey (i) No sampling register found (ii) No log book of tests and test results found, (iii) No copies test report which were allegedly sent with each batch, were found at Daman or at Ahmedabad factory or at the Head Office. Two or three reports enclosed in Paper Book by assessee do not prove the testing of each batch for huge turnover of the assessee for so many years, especially in view of the fact that no such register, reports were found at the time of survey (8) Assessee purchases 'Roasted Molybdenum Concentrate' from producers. Each such invoice also contains the percentage of Molybdenum as can be seen from one of the invoices found in assessee's paper book at page 482. If percentage of Mo is provided by the world premier suppliers, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of activity. So the mere mention of 'manufacturing' in these certificates does not make the activity of the assessee as 'manufacturing' for the purpose of Income-tax. DIC and the sales tax do not administer the Income-tax. Income-tax Act has to be implemented by the Income-tax Department. The words/phrases have to be interpreted to further the intention of the Act in providing section 80IB and the meaning of the same cannot be imported from other Acts as held by the Apex Court in Laxmi Machine Works. VI. Assessee claimed that by crushing and grinding FeMo lump, FeMo chips and FeMo powder are produced. These are new products having different name, character, chemical composition and these are purchased by different users. The argument is not correct. Crushing and grinding does not produce new product. It only results in reducing the size. Based on the size, it may be called lumps, chips or powder, but ultimately, it is FeMo only. Crushing and grinding reduces the size and sieving separates the FeMo into different size range, it will not change the chemical property. The argument of the assessee that lumps, chips and powder contain different percentage of Mo and Silica is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are disjointed and concocted to support self serving statements of the assessee. Assessee company only made a small establishment at Silvasa/Daman by placing a small jaw crusher, grinder, to make believe that crushing and grinding is taking place. Actual manufacturing of FeMo is taking place at Ahmedabad as it was taking place prior to 1998-99. Major crushing and grinding is also taking place at Ahmedabad. Only occasional or residual crushing & grinding of recycled material was taking place at Silvasa/Daman. Therefore entire profits of the company are attributable to Ahmedabad factory only. Assessee company has wrongly claimed deduction under section 80IB(3) for Silvasa/Daman units. Department has raised the grounds in detail bring out the facts of the case, supported by case laws, your honor may adjudicate on all the grounds." 13. Clarifying his stand further, the ld. AR submitted that no show cause notice has been issued to the assessee as to why the Silvassa Unit has higher profit as compared to Ahmedabad Unit. The AO has not made out any case that Silvassa Unit was result of splitting of Ahmedabad Unit. During the course of survey, inventory of everything has not been taken. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a manufacturing plant in the UK and utilize the service of two other manufacturers in the United States. In these countries the crushing, grinding and sieving activity of Ferrow Moly slabs into lumps, chips and powder is considered a manufacturing activity." 14.2 The ld. AR then referred to a letter from Vardhman Special Steels to the effect that they are using Molybdenum lumps and cannot use FMA smaller size of powder or chips. This is placed at page 396 of the Paper Book. The contents are reproduced as under :- "M/s Electro Ferro Alloys (P) Ltd. 208, Aditya Building, Near Khadayata Colony, Mithakhali Six Roads, Ahmedabad-380006 Dear Sirs, We are a steel plant having an electric arc furnace with 32 MT capacity. We regularly require Ferro Molybdenum lumps of size 20 to 80 mm for production of allow steel stainless steel. The specification is as under : Moly 60% Min. Si: 1.5% Max. C :0.1% Max. S :0.1% Max P :0.1% Max. Size:20-80 mm We cannot use Ferro Moly in smaller size such as powder or small chips. Please give us your offer as early as possible. Thanking you, For Vardhman Special Steels Sd/- Puneet Gupta) Executive (Materials)" 14.3 Similarly letter fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other sinter parts. All our raw materials are very fine powders. We use Ferro Molybdenum powder. It is below 325 mesh size and called Ferro Molybdenum sintered metallurgy grade. We cannot use Ferro Molybdenum in any larger size such as lumps or chips or even a course powder because only the fine powder uniformly blends with our other raw materials to form a homogeneous mixture which is cricital. For GKN Sinter Metals Ltd. Sd/ N.L. Chandrachud Exe-Vice President Metl)." 14.7 The ld. AR referred to standard and technical note received from Metallurgical Department of the assessee company which provided following difference between chemical and physical property of lump, chips and powder as under :- "Grain size is an important factor in determining the mechanical property of a material. Coarse grained materials have lower yield stresses than fine grained material. Moly is a strong carbide former and these carbides promote fine grained structure. Hence material having higher Moly % possesses higher yield stress and critical shear strees. Hence when a Fe Moly slab is crushed, the parts on the top part of the slab reduce in size i.e. break easily because it has lower Moly conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps : 70% Moly Ferro Moly chips :65% Moly Ferro Moly powder :60% Moly" 14.10 Then reference was made to pages, 390, 391 & 392 of the Paper Book which showed that Moly contents in lump was about 68-88%, that in chips was about 57.49% and that in powder 54.14%. Finally a reference to page 605 of the Paper Book was made which is test report from Quality Systems and Calibrations (P) Ltd.. Pune based concern which has tested the moly contents and size of the FMA lump, chips and powder. For the sake of convenience that report is reproduced as under :- 15. We have considered the rival submissions and perused the material on record. In our considered view the undisputed facts are that assessee is melting molybdenum ore and iron at Ahmedabad forming slabs which at different levels have different proportion of molybdenum and iron due to their different specific gravity. Molybdenum due to higher specific gravity settles in different proportion at different levels in a rectangular slab. These FMA slabs are sent to Silvassa and also to Daman where they are crushed through jow crusher, grinded through machines and thereafter sieved to separate them into rubbles, chips and powder. These items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got two casual workers. The various courts as cited by the ld. AR have held that the casual workers are to be considered for the purpose of section 80-I and even the supervisory staff is also to be considered for the purpose of deduction under section 80-I. The decisions referred to by the appellant are very much in support of the explanation given by the AR.: No contrary material has been produced before us. On the other hand, Hon. Karnataka High Court in CIT vs. K. G. Yediyurappa & Co. (1985) 152 ITR 152 (Kar) held that casual workers are also to be counted for finding out whether undertaking employed 10 or more workers. This decision was followed by the ITAT, Mumbai Bench in the case of ACIT vs. Richa Chaddha (2002) 282 ITR(AT) 001, wherein it is held that casual workers should also be counted for arriving at number of persons employed by the undertaking. It held that workers means a person employed directly or through any agency whether for remuneration or not for any manufacturing process. Worker according to section 21 of the Factory Act 1948 includes a person who is employed not only in manufacturing process but also in cleaning any part of the machinery or premises used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that melting of molybdenum and iron has to be got done at Ahmedabad due to prohibition imposed by local authorities to carry out such melting in metallurgical process at Silvassa and on the other hand, it was argued that such process in fact and indeed was carried out at Silvassa in the form of metallurgical laboratory testing. We are not convinced that such process in the form of laboratory testing could be carried out against the express prohibition imposed by the authorities unless assessee could show the basic records of laboratory testing supported by the affidavits of concerned officials that such testing was indeed done at Silvassa, even though it was illegal. We cannot accept one proposition that melting could not be carried out at Silvassa due to restrictions imposed by the local authorities and other proposition that melting was indeed carried out for testing. In-spite of repeated questions by the department to show the equipment with which such testing was carried out at Silvassa assessee remained silent. Therefore, we have only option to hold that assessee failed to produce evidence to show that any laboratory existed at Silvassa where melting of final produce was ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om purchasing of raw material, mixing iron scrap, melting, forming slab, crushing, grinding, sieving, testing and packing are parts of entire process in the manufacturing of rubbles, chips and powder of FMA. A combination of few processes may become manufacturing of intermediate product but for that matter combination of the rest of the processes cannot be held as not forming manufacturing process. In the manufacturing of a final product there can be several intermediate stages, different commodities are formed at intermediate stage. They could be manufacturing process by themselves. These intermediate products can have their independent identity and marketability. In our view mixing iron scrap with molybdenum or melting it at high degree temperature of 1800 degree centigrade and forming of the slab is one stage where one intermediate product is formed. It has different identity and structure. It can be sold as such and can be purchased by those who would use it as raw material for making other products of finer quality. Therefore, the claim of the assessee that it had outsourced a part of manufacturing process to Ahmedabad unit cannot be rejected unless it is found out by the AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion. As held above, what was done at Ahmedabad was an intermediate stage. It was a manufacturing process in itself and what is done at Silvassa is the final stage and it has to be seen whether it can also be a manufacturing process. Both the sides cited large number of authorities in respect of their arguments. Before applying the principles laid down in those authorities, we further analyze as to the exact nature of processing done at Silvassa. 15.8 Ahmedabad unit dispatches FMA slabs which are of very large size 100mm to 400mm. These are rectangle slabs of different shapes, having bumps or toughs resulting from melting and cooling process. It has edges and as such it cannot be used by various industries to whom assessee sells FMA. At Silvassa these slabs are crushed by jaw crushers. Then grinded to make granules and during process of grinding small pieces called chips and powder is formed. Size of granules is about 4 to 10mm, size of chips is of about 1 to 3 mm and powder contents of FMA of very small size of less than 1 mm. It is informed by the Metallurgical Engineers of the assessee company during the course of hearing that in the slab at various level, different proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent in use because of their different physical and chemical properties. 16. Now, we consider how the Courts have dealt with similar issues and how under what conditions they have dealt certain process as manufacture or production. Both the parties have referred to several judgments which more or less confirm to the same proposition as to what should be manufacture and what should not. 16.1 ITAT (Chennai Bench) in Vinbros and Co. vs. ITO (2008) 297 ITR (AT) 280 (ITAT Chennai) held that where after carrying on process a different commodity emerges it would be a manufacture. In that case the issue was whether undertaking was carrying out any manufacture or production of any article or things for the purpose of deduction u/s 80IB. The raw material used was rectified spirit and what were manufactured were bear, wine and other alcoholic spirits. It was held that the end product was quite different than the rectified spirit which was converted into bear, wine and other alcoholic spirits even though basically they would be alcoholic. The raw material including rectified spirit are not fit for consumption by human being but the end product being IMFL potable and is so recognized in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufacturing activity. 16.5 In CIT vs.Jansons & Co.(2006) 283 ITR 175 (All) the Hon'ble Allahabad High Court held that word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterized as production, every production need not amount to manufacture. In that case, the assessee used to purchase Koramal from Karkhanedars in pieces, carried out process of welding, polishing, lacquering, engraving and creaming etc., converted into a finished product saleable in the market. It was held to be producing the goods within the meaning of section 35B (A). 16.6 In Ship Scrap Traders and others vs. CIT (2001) 125 ITR 806 (Bom) the Hon'ble Bombay High Court held that expression "manufacture" in ordinary acceptance is of wide connotation. It means making of article or material commercially different from the basic component by physical labour or mechanical process. The word production or produce when used in juxtaposition with manufacture takes in, bringing into existence of new goods by the process which may or may not amount to manufacture. In that case, the assessee was engaged in ship breaking, old ships were brought for the purpose of break ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character.It was marketed as a commodity different from plain glass. The assessee was held to be entitled to the benefit of section 80 I. 16.9 In CIT vs.Eco tech Foundations and Construction (2000) 241 ITR 90 (Ker) the Hon'ble Kerala High Court held that test for determining whether manufacture can be said to have taken place is whether commodity which is subjected to the process of manufacture can no longer be regarded as original commodity but is recognized in the trade as a new and distinct commodity. In that case the assessee was engaged in the execution of pill foundation work and it was held that the assessee is not engaged in any manufacturing activities. 16.10 In CIT vs. Lucky Minerals (P) Ltd. (1977) 226 ITR 245 (Raj) the Hon'ble Rajasthan High Court held that the word manufacture implies change but every change is not manufacture although every change in article is a result of treatment, labour and manipulation. To bring about the change qualifying as manufacture, something more is necessary and that something is transformation of the original raw material into a new distinct and different article having new identity, name character or use. Where the commodity retains a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot remain the same, it became slabs or tiles. Such activity resulted into emergence of a new and distinct commercial commodity and only amount to manufacture or production in terms of section 80 IA. 16.14 In Indian Cine Agencies vs. CIT (2009) 308 ITR 98 (SC) Hon'ble Supreme Court considered the case of an assessee who converted jumbo rolls of photography films into small flats and rolls in desired sizes. It was held that it amounted to manufacture or production for the purpose of allowances u/s 32AB, 80 HH and 80 I of the Act. 16.15 In CIT vs. Prabhudas Kishordas tobacco Products P. Ltd. (2006) 282 ITR 568 (Guj) Hon'ble Gujarat High Court considered the case of a tobacco dealer who was buying tendu leaves and tobacco. Assessee had hired contract workers who rolled the leaves into bidis which was sold under its brand name. It was held that tendu leaves and tobacco which were used as inputs do not retain their independent identity after the bidis are produced after undergoing various processes. Commercially the final product is known as different commodity and has a separate market. It was held that the assessee was engaged in manufacturing of bidis entitled to deduction u/s 80 HH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an input, applies certain process and output is obtained. (B) The process can be manual or through machineries or combination of the two. (C) Output is different than the input in physical shape or composition or in use. (D) The output is known by a different name in the commercial world as compared to the input. (E) It is not material that physical or chemical composition of the inputs and outputs should be different. What is material is the use of the outputs and cannot be replaced by the inputs. 18. When we apply the above principles to the input, process and output carried out by the assessee we find that - (I) The input is the FMA slabs brought from Ahmedabad Unit. It is a semi-finished product having very large size of 100 mm to 400 mm. It has varying contents of molybdenum, iron and silicon which vary according to the time given for freezing, to the melted mixture of iron, molybdenum and silicon and also to percentage of silicon and iron melted with molybdenum. As per the certificates relied upon by the learned AR and not controverted by the revenue, the fluid dynamic of the molten masses i.e. molybdenum, iron and silicon depends upon cooling rates and freezing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this conclusion we need not go into the disputed issue as to whether the assessee is having any laboratory or testing facility at Silvasa or whether raw material as such was directly imported to Silvasa or was directly taken to Ahmedabad. In brief, the process of crushing, grinding and sieving FMA slabs into lumps, chips and powder creates three end products which have different physical shapes, different chemical composition of iron, molybdenum and silicon and have different chemical properties such as different melting points and are used by different industries. Their use is not inter-changeable, in the place of lumps, chips or powder or slabs as such cannot be used. These end products are known by different names in commercial world and therefore, the process employed by the assessee would amount to manufacture and, therefore, the assessee would be entitled to deduction u/s 80 IB. We accordingly confirm the order of the learned CIT(A) on this point. 20. Thus above discussion disposes of the appeals of the Revenue for Asst. Year 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05 which are as per above discussion dismissed by upholding the order of ld. CIT(A). C.O. No.171/Ahd/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A) did not accept the above contention. In our considered view the claim of the assessee cannot be allowed because interest on FD even for Letter of Credit purposes cannot be called to be derived from industrial undertaking. There has to be a direct nexus. Since there is no direct nexus, the claim of assessee cannot be allowed. It was then claimed that effect of netting should be allowed to the assessee. In our considered view the netting of interest earned against interest expenses could be allowed for the purpose of exclusion only to the extent interest expenditure is directly relatable to earning of interest income. Where assessee has borrowed funds and paid interest and deposited such borrowed funds into F.D. then netting would be allowed but where borrowed funds are utilized elsewhere there cannot be direct nexus of interest earning and interest expenditure. Netting to that extent cannot be allowed. For the purposes of finding out nexus we restore the matter back to the file of AO. This issue is allowed for statistical purposes. 21.4 The third item is about insurance receipt for damages on goods. The issue is directly covered by the decision of Hon. Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased during the year at ₹ 4,55,192/- in the name of Shri Adarsh Jhaveri, Director of the assessee company which claimed depreciation thereon. As legal ownership did not vest in the company the AO disallowed the claim. The ld. CIT(A) allowed the claim following the decision in the case of Mysore Minerals Ltd. 239 ITR 775 with the following observations :- "5.2 On consideration of the facts of the appellant's case it is noticed that the motor car was purchased though in the name of the appellant's director, it was purchased out of the funds of the appellant company and it is also not in dispute that the motor car was purchased for the purpose of business of the appellant. Thus the motor car being business asset of the appellant and purchased for the purpose of business and used as such by the appellant, in view of the decision in the case of Mysore Minerals 239 ITR 775 referred to above and other decisions cited by the ld. AR, I hold that the disallowance made by the AO on this ground is not justified and hence the same is directed to be deleted." 22.2 In the present case it is not disputed that investment was made by the assessee in purchase of the motor car. It is shown ..... 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