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TMI Blog2021 (7) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... iferous compounds through his proprietary concern M/s Khattri Aromas. For the assessment year under dispute, the assessee had originally filed his return of income under section 139 (1) of the Act. Subsequently, on 04.12.2014 a search and seizure operation under section 132 of the Income Tax Act, 1961 was conducted in assessee's residential as well as business premises. In consequence of the aforesaid search and seizure operation, the AO initiated assessment proceedings by issuing notice under section 153A of the Act. In response to the said notice the assessee on 28.07.2016 again filed a return of income declaring total income of Rs. 14,74,35,660/- after claiming deduction under section 80IC of the Act. In course of assessment proceedings, the AO, from the material available on record, found that the in course of search and seizure operation in the factory premises of the assessee a statement on oath was recorded from one of his employees, namely, Shri Sanjeev Kumar Agarwal, wherein, the concerned employee, on query being raised regarding the manufacturing process adopted by the assessee, stated that the manufacturing activity involves mixing of certain raw materials at a time in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of deduction. Further, after analyzing the facts and material on record, learned Commissioner (Appeals) also recorded a factual finding that the assessee is involved in manufacturing activity. Hence, entitled for deduction u/s 80IC of the Act. Accordingly, he allowed assessee's claim. 5. At the outset, Shri Nitesh Joshi, learned counsel for the assessee submitted, the issue is squarely covered by the decision of the Tribunal in assessee's own case in assessment years 2010-11, 2011-12 and 2012-13, wherein, the Tribunal following its own decision in case of assessee's sister concern M/s Khushbu Industries has allowed assessee's claim of deduction under section 80IC of the Act. He submitted, since there is no difference in factual position in the impugned assessment year, the decision of the Tribunal would squarely apply. 6. The learned Departmental Representative, though, agreed that the Tribunal in the preceding assessment years has allowed assessee's claim of deduction under section 80IC of the Act, however, he relied upon the observations of the AO. 7. We have considered rival submissions and perused the material on record. As could be seen from the facts on record, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed by the AO in assessment years 2010-11 and 2011-12 and 2012-13 as well. However, learned Commissioner (Appeals) allowed assessee's claim of deduction. Being aggrieved, the revenue came in appeal before the Tribunal. While deciding revenues appeals in ITA No. 2173, 2174 and 2175/Mum/2018 dated 27.05.2020, the Tribunal upheld the decision of learned Commissioner (Appeals) observing as under:- "4. Learned representatives fairly agree that the issue in appeal is squarely covered by the order dated 19th October 2016 passed by a coordinate bench, in the case of DCIT Vs Khusboo Enterprises [ITA No. 371/Lkw/2016; order dated 19th October 2016]- which was also covered by the same search and seizure operations, for the assessment year 2008- 09, wherein the coordinate bench has, inter alia, observed as follows: 5. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below as well as the documents placed before us. The only question before us is whether the assessee is engaged in manufacturing activities to be eligible for deduction u/s 80IC of the Act. The provision of section 80IC although lays down various conditions to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct. There is proper reaction amongst the products to produce a distinct flavor or fragrance. It was submitted that a perfume or a flavor may involve from as less as 10 to as much as 50 raw materials to manufacture the product. Furthermore, a raw material may have 0.1% to even 50% of the constitution of finished goods. The raw materials have to be added in a proper chronological manner and a proper formulation without which the finished goods cannot be produced. The mixing has to be done at controlled temperatures to get the desired chemical reaction. The finished goods are themselves a result of chemical reactions only. Several raw materials used by the assessee are hazardous chemicals, which are not per se fit for human consumption or application. However, scientifically derived formulations, whereby other chemicals and substances are mixed with the material, such that the hazardous properties are removed, are used by the assessee. Several natural oils and flavors, which may otherwise rot/decay with passage of time, and are in concentrated form are required to be treated and blended with other chemicals etc. so as to render them usable in various type of industries and applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee vehemently contended that if this Tribunal wants to verify whether the product or the article produced by the assessee is different from the raw material having the different market value and which cannot be reconverted into the raw material, this Tribunal can verify the same by visiting the industrial unit of the assessee. After having the discussion with D.R, we decided to call for the demonstration of the manufacturing process of the assessee in respect of one of the item and therefore, the case when it was initially fixed for 14/09/2016 when the detailed argument has taken place, adjourned the case for 15/09/2016 to see the demonstration of two of the products of the assessee i.e. sweet gulab and compound bela. 5.4 On 15/09/2016 the representative of the assessee appeared along with three chemical engineers of the assessee company having different chemicals in small bottles along with the induction and glass jars. The assessee first demonstrated how the sweet gulab is manufactured. The chemical engineer showed us 15 items out of which two were in solid form while 13 were in liquid form. He pointed out that the items brought by him for manufacturing 100 gms of sweet g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect from 2004. Section 80IC nowhere defines the word "manufacture‟ or "production‟ of an article. We noted that the word "manufacture‟ or "production‟ of an article or thing has also been used u/s 80IA as well as u/s 10B of the Act. Section 10B defined the word "manufacture‟ for the purpose of the said section to include any - (a) process or (b) assembling or (c) recording of programme on disc, tape, perforated media or other information storage device. Thus, "process‟ was included within the word manufacture for the purpose of sec. 10B. Explanation (iv) of the said sec. 10B further provided that the word "produce‟ for the purpose of said section, in relation to any article or thing shall include production of computer programme. CBDT vide its circular no. 528 dated 16/12/1988 176 ITR ST. 154 explained the [provisions enacted by the Finance Act, 1988 under para 8.2 of the circular. In this circular, CBDT had clearly explained that the said new sec. 10B had been inserted in the statute book with a view to provide further incentive for earning foreign exchange so as to secure that the income of a 100% EOU shall be exempt from tax for a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serted in section 2 of the Income Tax Act, 1961defining the expression "manufacture" as under: "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,- (a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or (b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 5.11 In Chowgule & Co. Pvt. Ltd. Vs. Union of India (1981) 1 SCC 653 Hon‟ble Supreme Court, after considering the judgment of Hon‟ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay (1959) 10 STC 500 (Bom.), clearly observed on the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted "manufacture or processing or ore for sale within the meaning of section 8(3)(b) and Rule 13 of the Central Sales Tax Act, 1956. Dealing with this question, their lordships held and observed at pages 659 and 660 of the reports as under:- "It still remains to consider whether the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handling plant experience change in their respective chemical and physical composition, because what is produced by such blending is ore of a different chemical and physical compositions. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to "processing" of ore within the meaning of Section 8(3)(b) and Rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities for such ore on the conveyor belt of the mechanical ore handling plant, but to our mind it is immaterial as to how the blending is done and what process is utilized for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical composition is a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is engaged in these units in manufacturing. 5.13 Further, in CIT Vs N.C. Budharaja & Co. (1993) 204 ITR 412 (SC), Hon‟ble Supreme Court further observed that the word "production" is much wider than the word "manufacture". It was said (page 423): "The word "production" has a wide connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to manufacture... The word "production‟ or "produce‟ when used in juxtaposition with the word "manufacture‟ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods." 5.14 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon‟ble Supreme Court defined the word "production‟, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word "production" in the Oxford English Dictionary, as meaning "amongst other things that which is produced; a thing that results from any action, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay held that different brands of tea purchased by the assesses could not be regarded as "processed‟ within the meaning of the proviso to clause (a) of Section 8, because there was "not even application of mechanical force so as to subject the commodity to a process, manufacture, development or preparation" and the commodity remained in the same condition. The argument of the Revenue before us was that this decision of the Bombay High Court was on all fours with the present case and if the blending of different brands of tea for the purpose of producing a tea mixture in accordance with a formula evolved by the assesses could not be regarded as "processing‟ of tea, equally on a parity of reasoning, blending of ore of different chemical and physical compositions could not be held to constitute "processing‟ of the ore. Now undoubtedly there is a close analogy between the facts of Nilgiri Tea Company case [10 STC 500 (Bom HC)] and the facts of the present case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Tea Company case [10 STC 500 (Bom HC)] as laying down the correct law. When different brands of tea were mixed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mixing, a qualitative change, in that the tea mixture which came into existence was of a different quality and flavor than the different brands of the tea which went into the mixture; (ii) There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the assessee, since, in the present case, the blending was done by application of mechanical force, but that is not the correct test to be applied forthe purpose of determining whether the operation constitutes is "processing‟. (iii) The question is not whether there is any manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes "processing". 5.18 Therefore, Hon‟ble Supreme Court, in construing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that blending of tea does not amount to "manufacture‟ or "production‟ of an article or thing, but is only processing. Hon‟ble High Court allowing the appeal of the assessee held that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognized as a 100% EOU division and the Department had no case that the assessee‟s unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial units of the assessee‟s 100% EOU, it would defeat the very object of section 10B of the Act. (similar to assessee‟s case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon‟ble High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant would be denied of export exemption available under section 80HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies‟ case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export processing zones, free trade zones and to 100 per cent export oriented units covered by sections 10A, 10AA and 10B of the Income tax Act. Therefore, following the judgment of this court above referred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant‟s entitlement for exemption." 5.20 Hon‟ble high court in this case, in our opinion, has clearly laid down that once the assessee is recognized as a 100% EOU for engaging in an activity and assessee is engaged in the same very activity, if the exemption is denied to the assessee on the ground that there is no production or manufacturing but on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dust and foreign substances and thereafter it blends different varieties of tea to make it of "uniform and consistent‟ quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claimed exemption u/s 10B of the Act in respect of its 100% EOU for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The AO rejected the claim of assessee of exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:- "32. The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 957 issued by the Government of India, Ministry of Commerce & Industry (Department of Commerce) the expressions "flavour tea", "green tea" "instant tea", "packet tea" "quick brewing black tea", "tea" and "test bag" have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions "manufacturer", "Buyer", "Packet Tea", "Tea Bag",- "Green Tea", "Quick Brewing Black Tea", "Instant Tea" and "Made Tea" have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression "manufacture" as under: "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing, - (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Distribution & Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above. 35. We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture‟ which included 'processing' contained in section 1OB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `manufacture‟ under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we "hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act. 37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no manufacturing activity, then the question of referring to item 10 of Eleventh Schedule for the purpose of exclusion does not arise. From this judgment, thus, it is apparent that the Hon‟ble Apex Court accepted that manufacture/production includes processing also. 5.26 We have also gone through the decision of Hon‟ble Supreme Court in the case of ITO Vs. Arihant Tiles and Marbles Pvt. Ltd. 320 ITR 79(sc). In this case when the assessee was engaged in the activity of cutting and polishing of marble blocks, the question before the Supreme Court was whether the activities undertaken by the assessee would fall within the meaning of the words "manufacture or production‟ in section 80-IA of the Income-tax Act, 1961? In this case, Hon‟ble Supreme Court, after discussing the definition of "manufacture‟ given in section 2(29BA) of the Income tax Act, 1961 and also discussing the provisions of section 80-IA(2)(iii) and after going through various decisions, held as under: "22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of CIT(A)." 5. Dealing with exactly the same grounds of appeal in the case of sister concern Khushbu Industries, and vide order on ITA Nos. 2164 to 2169/Mumbai/2018, a coordinate bench has dismissed identically worded appeal and added as follows: 5. Learned Departmental Representative, however, urges us not to follow the aforesaid order. He submits that even though the aforesaid order is confirmed by Hon‟ble jurisdictional High Court, Their Lordships have confirmed the order on technical grounds and not on merits. He also submits that what has been termed as production is just mixing up of products and repacking the same. In support of this contention, he relies upon the statement given by an employee during the course of search proceedings. None of these submissions, however, impress us. Even though the order of the coordinate bench is confirmed by Hon‟ble High Court on technical ground, that does not mean, or even imply, that the binding nature of the decision, on merits, is affected. The decision of the coordinate bench binds us nevertheless. In any case, we have carefully perused the order of the coordinate bench and we are in considered agreement with the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed. 10. In ground no. 4 the revenue has challenged deletion of disallowance made under section 14A of the Act. 11. Briefly the facts are, in course of assessment proceedings, the AO noticed that the assessee has made substantial investment in shares/securities on which exempt income by way of dividend has been earned. Whereas, the assessee has not disallowed any expenditure attributable to such exempt income. Therefore, he called upon the assessee to explain why disallowance under section 14A r.w.r. 8D should not be made. In response, it was submitted that the assessee is engaged in trading in shares and securities. Hence, they are stock in trade of the assessee. It was submitted, since dividend income was earned out of such trading activity and not as a result of any investment activity, no disallowance of expenditure under section 14A can be made. The AO, however, was not convinced with the submissions of the assessee and proceeded to compute disallowance under section 14A by applying rule 8D. In the process, he disallowed an amount of Rs. 2,58,24,377/-. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance as placed in the paper book. 15. We have considered rival submissions in the light of the decisions relied upon and perused the material on record. As far as assessee's contention that the AO has not recorded proper satisfaction regarding correctness of assessee's claim regarding expenditure in relation to earning of exempt income, we are not convinced. As could be seen, the assessee's stand from the very beginning for not disallowing any expenditure is, he is a trader in shares and securities and such shares are securities are held as stock in trade. Learned Commissioner (Appeals) has accepted the aforesaid contention of the assessee while granting relief. However, the legal position has completely changed after the decision of the Hon'ble Supreme Court in case of Maxopp Investments vs. CIT (supra), wherein, the Hon'ble Supreme Court has very clearly held that no distinction can be made between investment and trading activity while applying provisions of section 14A r.w.r. 8D. In other words, the Hon'ble Supreme court has held that the disallowance of expenditure under section 14A has to be made even on shares and securities held as stock in trade. As per Article 141 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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