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TMI Blog2018 (3) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... ty or heavy machinery similarly does not require highly literate, technically qualified staff the fact that the individual parts on going through the process of manufacture result in production of products which are separate and distinct from the sum total of the purchased parts which are identified as separate products in the market having separate and distinct identity from its individual parts. The claim has been rejected on suspicious and surmises ignoring the facts on record and on an incorrect appreciation of law for the reasons set out herein above at length. Accordingly for the reasons set out herein above the claim of the assessee is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions advanced concluded that infact there was no manufacturer of any product. He noted that the manufacturing expenses, salary expenses etc. debited in the profit & loss account were negligible. There was no machinery to carry on the manufacturing process. The assessee was accordingly required to justify its claims. After hearing the assessee he held that the AO was justified in denying relief qua the two products and issued an enhancement notice for justifying why even the deduction allowed by the AO not be withdrawn for Laptops and mouse. The specific reason set out in the show cause notice read as under: - a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P&L account includes only purchase cost and cartage inwards cost. c. No expense on manufacturing has been debited to the P&L account. d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no manufacturing has been carried out by you. 2.3 Rejecting the explanation offered which have been reproduced in the impugned order at page 8 to 15 of the impugned order the CIT(A) held that the assessee did not pass the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 143 ( 1) and has attained finality. 3.2 Similarly in 2011 - 12 assessment year carrying out the very same activity the assessee declared a turnover of ₹ 3,00,30,984/- on which a profit of ₹ 92,42,715/- was declared. The claim of 80 IC deduction it was submitted was similarly supported by audit report duly certified by a chartered accountant after getting the books of accounts audited and considering the form 10 CCB filed in support of the claim on 10/09/2011 claiming 80 IC deduction to the tune of ₹ 92,30,390/- and declaring a total income of ₹ 12,330/-. The said return was also processed under section 143 and had attained finality. Thus it was his submission that since in the year under consideration also the assessee was carrying on the very same activity the occasion for the Department to deviate from the consistent view taken for the very same activity was contrary to the settled legal position. It was submitted that the fact on record that the assessee fulfilled all the conditions prescribed under the act and there is no new material on the basis of which the view has been varied the order of the CIT(A) ran counter to the following deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the AO as well as the CIT(A). Referring to the same it was submitted each of the steps have been elaborately discussed. Thus it was argued that on this incorrect appreciation of facts itself the claim of the assessee deserves to be allowed. Apart from that it was submitted that even before the CIT(A) the said explanation is offered by the assessee as would be evident from para-6.1.2 and it would show that the CIT(A) has held that Inspection, testing, branding, packaging, clearing and shipping etc are activities not unique to manufacturing. It was his submission that the assessee is not saying that these are unique to manufacturing the assessee was merely demonstrating that what are the steps taken and thus, it was argued the claim has been rejected on frivolous reasons. It was his submission that the CIT-A has held that the activity is mere assembly of different parts and the claim of the assessee has been rejected on the reasoning that the balance sheet did not show heavy deployment of capital assets or highly trained manpower etc. It was his submission that these are frivolous reasons and wrong facts. One of the assessee's partner Sh. Sanjay Wadhwa it was submitted was a qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opsis. Taking as an example simpler of the two products as an illustration it was submitted that a computer mouse may appear to be a simple item but for manufacturing/producing the same following separate items need to be purchased which are separately identified and individually cannot be considered to b a computer mouse as a products. The individual parts are purchased and used all : 1) mouse PCB which would include : a) PCB ; b) IR Sensor; 2) mouse plastic which would include : housing/casing (upper plastic cover); b) housing casing/(lower plastic cover); 3) wire ; 4) screws and 5) branding stickers labels etc. 3.7 Thus it was his submission that none of these individual items purchased can be said to constitute a computer mouse it is only after the individual items are assembled fitted, soldiered made functional by running a software and made ready to use after screwing attaching a specific length and quality of wire ensuring and testing that the functions are performed by the left and right clicks etc. only thereafter it can be sold as a separate product as a computer mouse. 3.8 Accordingly as per settled legal principles it was his submission that there was no occas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Trackpad, LCD screen, keyboard, etc. (b) CPU Processor 2. Memory includes - Memory module 3. Hard disc drive - Hard disc drive Characteristics/products Product 04 (Computer mouse) Raw materials/components Sl. No. Broad component Parts name 1. Mouse PCB includes (a) PCB (b) IR Sensor 2. Mouse plastic parts includes (a) Housing/casing/cover A (Upper plastic cover) (b) Housing/casing/cover B Now it can been clearly seen that the components and inoputs purchased for each of the item lose their identity after the processing / assembly is done by the assessee firm for each of the product and are different from the final product obtained as a result of such assembly process. 7. Also, the aforesaid parts/ components were mentioned broadly during the assessment proceedings along with the process notes given for manufacture/ assembly of such products, as appearing on Page No. 2 & 3 of the assessment order and also during the appellate proceedings as appearing on Page No. 9 of the order of the Worthy CIT(A),. A copy of the said process notes of manufacture/ assembly with broad components, which are already on record, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onents can act as a laptop without the aforesaid assembly process on its own. None of the components can act as a mouse without the aforesaid assembly process on its own. Marketability/commercial viability It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. It has a separate market for itself different from the market of that of its raw components/ materials and also known in the market by the said name specifically. Value addition and increase in value The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the goods produced. The sale price of the final products is higher than the cost of raw materials, thus clearly bringing out the value addition made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sit in the arm chair of a business man to decide the issues relating to the business expediency. Therefore, once the books of the assessee firm have been accepted beyond doubt, there remains no question on the lack of certain levels of plant and machinery / expenses as assumed to be apt by the Ld. AO. ii. Infact, since the assessee firm had been carrying on the said business for two previous assessment years, the staff of the assessee firm had become autonomous for the said production activities using the toolkits/ equipments& computer for testing & soldering and did not require immediate supervision from the partners in this regard and, therefore, the partners could be stationed in Delhi, taking care of the marketing activities for the products instead of production during the relevant assessment year. iii. Further the lack of qualified and sufficient personnel as alleged by the AO is completely not justified, where the sales of the assessee firm have not been doubted and accepted, as is and similarly, no doubts have been raised on the production facility of the assessee firm, thereby indicating that the production has, infact, taken place at the rented premises of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments of various High courts and Tribunals, wherein it has been held that Assembly clearly amounts to manufacture, in the cases of: ✓ CIT vs. MAHESH CHANDRA SHARMA (2009) 308 ITR 0222 (PaH HC)ar page 33 of the Judgment Set "Deduction under s. 80-IB-Manufacture or production-Assembly of motorcycle wheel- Motorcycle wheel assembled by assessee by using rim, tube, tyre, bearing, drum, spoke, nipple and collar resulted in an article distinct in name, character and use hence 'manufacture' eligible for deduction under s. 80-1B-Finding arrived at by Tribunal is a finding of fact not giving rise to any substantial question of law" CIT vs. JACKSON ENGINEERS LTD. (2012) 341 ITR 0518 (DEL HC) CIT vs. CHIRANJJEEVI WIND ENERGY LTD. (2011) 333 ITR 0192 (Madras HC)at page 38 of the Judgment Set ACIT vs. DIXON TECHNOLOGIES (I) (P.) LTD. (2013) 35 CCH 0484 (Del Trib) CIT vs. TATA LOCOMOTIVE & ENGINEERING CO. LTD. (1968) 68 ITR 0325 (BOM)ar page 41 of the Judgment Set From the above it can be clearly inferred that assembly of goods infact amounts to manufacture, as held in the various judgements above. The Ld. AO and the worthy CIT(A) have completely overlo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ketable for its ultimate use by the government agencies to whom supplies are being made by the assessee, entitles the assessee to the claim of the deduction u/s 80IC of the Act. We confirm the order of the CIT(A) in this regard." 3.10 Reliance was further placed upon the following decisions so as to argue that the process undertaken by the assessee amounts to manufacture : a) India Cine Agencies: Computer Graphics Ltd. Vs. CIT, (2009) 308 ITR 98 (SC) b) Vijay Ship Breaking Corporation & Others Vs. CIT (2009) 314 ITR 309 (SC) c) CIT Vs. M/s Oracle Software India Ltd. (2010) 320 ITR 546 (SC) 3.11 The decision relied upon by the CIT-A in the case of M/s Indican Software Vs. ITO it was submitted is clearly distinguishable on facts. The issue in the facts of the said case was the activity of software production which was held questionable on the basis of the enquires made by the Inspector. In the facts of that case unlike the present case the activity was carried out for only one year and which has been distinguished point wise in the separate tabular synopsis filed separately. In the case of the assessee it was submitted the evidence is discarded on presumption as no such enqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be considered to be outside the purview of production (manufacturing) by any stretch of imagination and thus the disallowance of deduction made in case of the assessee firm deserves to be deleted. 3.13 Accordingly it was his submission that infact it is clearly a case of change of opinion on same set of facts by the AO and the CIT(A) as no fresh material has been taken on record to vary the conclusions. The past history of the assessee itself has been ignored on an arbitrary reasoning contrary to settled legal principles. The facts in assessee's own case it was submitted have been ignored. Accordingly it was his submission that the necessary relief in accordance with law may be granted to the assessee 4. The Ld. Sr. DR Mr. Manjeet Singh reading through the assessment order and the impugned order submitted that admittedly the claim of the assessee has correctly been denied in view of the fact that there were a mere handful of employees barely qualified with absolutely no visible investment in machinery barring took kits/ laptops / computers etc. The absence of heavy machinery or any other major electrical expenditure are facts which come in the way of claim of carrying out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process laptops 1. Physical inspection of barebone computer on receipt from supplier. 2. Physical inspection of Hard Disk Drive on receipt from supplier. 3. Physical inspection of Memory on receipt from supplier. 4. Serial Nos. of all the components. 5. Testing of barebone computer. 6. Testing of Hard Disk Drives. 7. Testing of Memory. 8. Installation of Memory inside the barebone computer. 9. Installation of Hard Disk Drive inside the barebone computer. 10. Loading of operating systems/required softwares. 11. Testing of printer and other devices on the computer. 12. Testing of all the ports. 13. Branding. 14. Testing of Software compatibility. 15. MRP stickers and labelling. 16. Cleaning and packing. Kinko Computer Industries Manufacturing process of external Hard Disk Drives : 1. Physical inspection of casing. 2. Physical inspection of drives. 3. Testing and examination of the casing. 4. Testing and examination of the drives. 5. Testing and inspection of USB ports. 6. Testing of USB cables. 7. Inspection. 8. Assembly of drives in casing. 9. Final testing. 10. Final inspection. 11. MRP sticker and labeling. 12. Cleanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e very basic reason that nomenclature, character and use of the products namely Hard Disc and DVD Writer remains the same. The only difference made at the premises of the assessee is that the Hard Disc /DVD Writer is put into a casing to be attached to a USB Drive. The Hard Disc or the DVD Writer has the same function or use even without the casing also and the casing merely provides an outer shell or packing to protect it from external factors. Merely putting the HDD/DVD Writer into a casing does not amount to manufacture/production by any stretch of imagination. Both the items are i.e. Hard Disc & External Casing are easily available in the open market and various online sixes. Any layman can purchase the two and put she functional disc into the casing without using even a screw driver. (ii) Dissecting the claim of other activities being undertaken by the assessee in the process like testing, inspection etc. the facts as depicted in the balance sheet and P&L of the assessee and other documents submitted during the course of assessment does not prose the same. As per the schedule of fixed assets attached to the balance sheet of the assessee. there is no plant & machinery or test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation of hard disk drive and loading operating system on the computer respect of laptops and assembly of drive in casing out of the various steps listed in assembly of hard disk drives and external USB DVD writers. The question that follows is that has the appellant discharged the onus on him to establish that he is carrying on manufacturing and does he have the resources and manpower to carry out a manufacturing as claimed by the appellate. A perusal of the material on record showed very glaring facts which could not be ignored. The name are listed as under: a. There is no machinery at all in your fixed assets schedule. b. The cost of manufacturing as shown in P & L account include; only purchase cost and cartage inwards cost. c. No expense on manufacturing has been debited to the P & L account. d. The expense on personnel expense, electricity and other facts brought by the A.O. on record show that no manufacturing has been carried out by you. 6.1.3 Through the show cause notice for enhancement of incorr e u/s 251 of the I.T.Act issued to the appellant, the above observations made by this office were confronted to the appellant. The reply of the appellant is not repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is sing various items from vendors in New Delhi and is selling most of its s to its sister concern situated at New Delhi, the contention of the appellant that the goods were purchased from New Delhi, assembled in HP ani sold back in Delhi does not make much business sense. 5.4 I find on a reading of the above in the light of the decisions relied upon by the assessee before the Bench that the reasoning and conclusion of the assessing officer upheld by the CIT(A) that the order of the CIT(A) on facts cannot be uphold. The decision of the coordinate Bench dated 09/08/2016 in ITA 248/CHD/2015 in the case of Indica software it is seen relied upon by the Revenue is wholly inapplicable. In the facts of the said case the coordinate Bench was considering the legitimacy of assessee's claim of having carried out production of software development. On a careful reading of the said decision it would be seen that the issue had been considered by the ITA T in the first round the claim of software development which necessarily required highly specialized man power for writing the software etc. was found to be absent whereas considering the production activity addressed in the facts of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as software professionals or had any past experience in the said business. The qualifications of the employees and their number also could not justifiably address the claim of software having been produced. The assets were noticed as incapable of being sufficient for software development activity as only one computer was noticed to have been available to the said firm. Accordingly it is seen that the said decision is entirely distinguishable on facts. In the facts of the present case the assessee has a partner namely Mr Sanjay Wadhwa who is a B Tech. Engineer and the staff employed was sufficient and capable of manufacture/produce the hardware by assembling; fitting; making functional; casing; screwing; attaching wire testing packing etc. the separate and distanct products. There is no dispute that whereas for developing software a highly qualified trained technical manpower is required whereas for the activities of the assessee a rudimentary knowledge and after initial limited training only dext finger work is more than enough. 5.6. Before addressing the case law relied upon by the Ld. AR it is appropriate to also make a reference to the decision of the jurisdictional High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision." 5.8. Accordingly I find that the reliance placed upon the said decision by the Revenue is misplaced. On the contrary, a perusal of the decision dated 3rd of August 2017 of the Apex Court in the case of CIT-V versus M/s Hindustan Petroleum Corporation in CA No. 9295 of 2017 which has been relied upon by the Ld. AR supports the case of the assessee. It is seen that in the facts of the said case the assessee respondent was engaged in the process of bottling liquefied petroleum gas cylinders meant for domestic use. Benefit under sections 80 HH, 80 I and 80 IA in the respective years was under consideration. In the facts of the said case, the Assessing Officer had disallowed the deduction claimed on the grounds that LPG was produced and manufactured in refineries and thereafter there was no change in the chemical composition or other properties of the gas in the activity of filling the cylind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to 'manufacture' or production of an article. Therefore, the profit derived from each activity is eligible for the claim of benefit under s. 80-IA of the Act." 5.9. I further find that the decision mentioned at serial number 7 of the Apex Court also supports the view taken. We note that infact the decision of the jurisdictional High Court in the case of ACIT versus Micro-instruments company (2016) 97 CCH 0001PHHC of the jurisdictional High Court which had been relied upon by the Revenue has also been relied upon by the assessee. Specific para 8 of the said decision is reproduced hereunder: 18. We have carefully considered the rival submissions perused the order of assessment and material placed on record. The first and foremost issue that arises for our consideration in this appeal is in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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