These are the cross-appeals directed against different orders of the CIT(A) for the asst. yrs. 2006-07 to 2009-10. The assessee also filed crossobjections for all the assessment years under consideration. As the issues are identical in these appeals and cross-objections, the same were clubbed and heard together and, therefore, these appeals and crossobjections are disposed of by way of this common order for the sake of convenience.
2. To dispose of these appeals, we refer to the facts from asst. yr. 200607 in ITA No. 398jVisakhaj2012. Briefly the facts of the case are that the assessee is a partnership firm and 100 per cent Export-Oriented Undertaking (EOU), engaged in the business of manufacturing and trade of biological products, pharmaceuticals, ayurvedic products and herbal extracts. The original assessment for asst. yr. 2006-07 was completed on 17th Dec., 2008, allowing deduction under s. lOB of the Act. Subsequently, survey operation under s. 133A of the Act was carried out by Dy. DIT (Inv.), Vijayawada and based on the findings during the survey, the assessment was reopened under s. 147 of the Act, after duly recording the reasons therefor. Thereafter, the reassessment was completed on an income of Rs. 23,03.43,847 after denying the exemption claimed under s. lOB of the Act. The main reasons for denying deduction under s. lOB of the Act, was that (a) machinery was not installed during the financial year 2005-06 relevant to asst. yr. 2006-07, (b) As some part of the manufacturing activity was given on job work to Mj s Laila Impex, that the AO doubted the claim of the assessee that it is carrying out manufacturing activity within the premises of the assessee and (c) The assessee is not carrying out any manufacturing activity.
2.1 The manufacturing process of the appelbnt firm involves the following six steps:
Step I : Process of solution : Herbal raw materials are taken into Extractor, then water Hhydro-alcohol (which is required for extraction) is added and then the raw materials are heated in at 70 to 80 degrees centigrade for one to one and half-hour by using of steam and then circulate the solution through pump for 2 to 3 hours.
Step 2 : Process of concentration: The solution as per the above process is taken into the reactor and mixed with the required chemicals like activated carbon, potassium hydroxide, sodium hydroxide etc. Thereafter, the solution is filtered with the aid of filter to remove the herbal particles and concentrate the filtrate by using of vacuum (removing of excess water, hydro-alcohol) and this process is repeated till thick paste or residue is obtained.
Step 3 : Process of drying : The above thick paste is dried in sinplast drier j spray drier. After drying, paste will become solid dry flakes.
Step 4 : Process of pulverization : The dried flakes are milled in multi-mill and thereby it becomes powder.
Step 5 : Process of si1?ving : The milled powder is sieved on sifter by using required meshes to get fine powder as per requirement of the customers. These products have a separate name and entity in the market.
Step 6 : Packing: The above powdered extract is packed into air-tight HOPE Carboys having double polythene bags in different sizes as per requirement of the buyers.
2.2 The appellant firm took permission vide letter dt. 14th Oct., 2005 to send its raw material to its sister concern Laila Impex for job work. As per Customs regulations, subcontracting of both production and production processes may be undertaken without any limit through other EOU. Laila Impex is also an EOU as evidenced by approval letter dt. 3rd June, 2005.
2.3 The Dy. Director of IT (Inv.) conducted a survey at the factory premises on 17th Sept., 2009 and on examination of the information submitted by the appellant firm he noticed certain discrepancies with regard to bills for fabrication charges issued by three contractors for the asst. yr. 2006-07. When the Inspector of Income-tax was sent for enquiry, the fabricators were not found at the addresses mentioned in the bills issued by them.
2.4 Further, Deputy Director of IT analysed the information submitted to him and found the following from the information for the asst. yr. 2006-07 :
(a) That out of the manufacturing expenses of Rs. 4,65,34.414 a sum of Rs. 4,35,04,675 was incurred by Laila Impex and this works out to 96.56 per cent of the total manufacturing expenses and that 90.4 per cent of the total manufacturing expenses is paid to Laila Impex towards job work charges.
(b) Out of manufacturing and establishment expreses of Rs. 10,10,643 a sum of Rs. 1,57,715 was towards monthly salaries of the assessee firm and the balance was borne by Laila Impex.
(c) Out of power and fuel of Rs. 65,28,127 a sum of Rs. 54,95,037 was towards diesel for generators and only the balance of Rs. 10,38,090 was towards power bills.
(d) Out of the six stages, only the first two stages can be considered as manufacturing and out of this stage 1 is carried out by Laila Impex .•..
2.5 Thus, the Dy. DIT (Inv.) was of the view that the appellant firm is not entitled to claim exemption under s. lOB of the Act and the same thing was informed to the AO in his report addressed to the AO.
2.6 The AO followed this report of the Dy. Director of IT (Inv.) in his order. The finding of the Dy. Director of IT (Inv.) became the finding of the AO in the assessment order.
3. On appeal, the learned CIT(A.) held as follows:
1. On the issue as to whether the assessee is in possession of the machinery to carry on manufacturing activities during the financial year 2005-06 relevant to asst. yr. 2006-07, he relied on the certificates issued by Asstt. Commr. of Customs & Central Excise as well as registration/permissions from the various Governmental authorities and held that the assessee was in possession of machinery and carried out manufacturing activity in financial year 2005-06.
2. On the issue of sub-contracting part of work, the learned CIT(A) held that not only manufacturing expenses have to be considered by the AO to arrive at the percentage of outsourcing, but, all other manufacturing expenditures like raw material, chemicals, fuel, manufacturing establishment, etc., have also to be considered. Thus, on facts he held that outsourcing of job is only about 21.27 per cent and not 90 per cent as held by the AO. He referred to certain judicial decisions and granted relief to the assessee.
3. Thereafter, the learned CIT(A) on the ground that the assessee has not completely proved that its employees have, in fact, supervised the job work, which was offloaded, held that, profit on the turnover attributable to job work Le. 21.27 per cent of the total turnover should be ascertained and that such profits should be excluded from claim of deduction under s. lOB of the Act.
4. Aggrieved, the Revenue is in appeal on the decision of the learned CIT(A) that the assessee is eligible for deduction under s. lOB. The assessee is in appeal against the direction of the learned CIT(A) that profits on 21.27 per cent of the total turnover being job work should be computed and excluded from the computation of eligible profit for deduction under s. lOB.
5. Grounds of appeal of the Revenue, which are common in all its appeals, are extracted below for ready reference :
"(a) The CIT(A) erred both in law and in facts of the case.
(b) The learned CIT(A) has erred in accepting the contention of the assessee based on the machinery verification certificate issued by the Superintendent of Customs & Central Excise which lacks clarity as to the nature of machinery used whether old or new and as to its specification.
(e) The learned CIT(A) has erred in allowing exemption under s. lOB even though the assessee has failed to fulfil the conditions laid down under s. lOB(2) of the Act.
(d) The learned CIT(A) has erred in presuming that the machinery purchased was new even though it was not known whether the machinery purchased was new or old.
(c) The learned CIT(A) has erred in accepting the contention of the assessee that the labour contractors are available and accepting the confirmations submitted by the labour contractors through the assessee, who are not available to the Department for serving the notices.
(0 The learned CIT(A) has ern'd in allowing exemption under s. lOB by concluding that machinery was installed even though the assessee has not installee! machinery fully during the first year of the manufacturing i.e. asst. yr. 2006-07 and purchased further machinery in the subsequent years.
(g) The learned CIT(A) has erred in accepting the contention of the assessee that Superintendent of Customs & Central Excise has submitted a report to VSEZ that machinery was installed even though VSEZ has denied that no such report was received from Department of Customs & Central Excise.
(h) The learned CIT(A) failed to note that out of manufacturing establishment expenses of Rs. 18,77,6897, only Rs. 1,57,715 was incurred by the assessee and the balance of Rs. 16,10,643 is borne by M/s Lalla Impex which is evident from the debit notes raised by them. (Para 2 of p. 3 of assessment order).
(i) The learned CIT(A) failed to observe that out of Rs. 10,38,090 towards lower, the assessee has actually expended only Rs. 30 while that incurred by M/ s LaiIa Impex as per the debit notes raised by them was Rs. 6,65,873 and an amount of Rs; 3,67,187 is paid by the assessee on behalf of others and not for itself (para 3 of p. 3 of assessment order).
(j) The learned CIT(A) ought to have considered the manufacturing estabhshment expenses, diesel and electricity expenses as job work charges while arriving at the per cent of job work charges in total mfg. expenses at 21.27 per cent. .
(k) The learned CIT(A) erred in calculating the per cent of job work charges in total manufacturing expenses at 21.27 per cent as against 96.56 per cent worked out by the AO.
1. Any other ground that may be urged at the time of hearing."
6. Grounds of appeal of the assessee, which are common, in all its appeals, are extracted below for ready reference :
"1. The order of the learned CIT(A), Vijayawada is contrary to the facts and also the law applicable to the facts of the case.
2. The learned CIT(A) ought to have held that the notice issued unser s. 148 was not a valid notice in as much as the AO did not furnish the reasons recorded by him despite repeated requests on the part of the appellant.
3. The learned CIT(A) ought to have held that the notice issued under s. 148 is not a valid notice in as much as the notice was issued on mere 'change of opinion' more so when the exemption under s. lOB was allowed in the original assessment completed under s. 143(3) of the Act after making necessary enquiries.
4. The learned CIT(A) ought to have quashed the entire reassessment proceedings as uoid ab initio in as much as the notice issued under s. 148 is not a valid notice.
5. Without prejudice to the above, the learned CIT(A) is not justified in restricting the exemption under s. lOB to 78.73 per cent of the total claim of Rs. 23,03,43,847 made by the appellant.
6. The learned CIT(A) is not justified in holding that the appellant could not prove that the job work was carried out under the supervision of the appellant.
7. The learned CIT(A) having held that the salaries of the persons supervising the job work is to be allowed, could not have in the same breath held that the job work was not supervised by the appellant.
8. In any event, the learned CIT(A) is not justified in disallowing the exemption under s. lOB with regard to 21.27 per cent of the turnover in as much as there is no provision in the Act to divide the turnover on sale of finished goods in the manner done by the learned CIT(A).
9. The learned CIT(A) having held that the appellant fulfilled the requisite conditions of s. lOB, ought to have fully allowed the exemption under s. lOB."
7. The leqrned Departmental Representative Shri K.V.N. Charya referred extensively to the order of the AO and submitted that consequent to survey, it came to the notice of the Department that machinery was not installed during financial year 2005-06. He referred to para 3.3 of the assessment order and submitted that the claiming fabrication work from three parties could not be cross-verified. Notices under s. 133(6) were returned unserved by the postal authorities. IT Inspectors conducted enquiries and it was found that no such address is traceable. The assessee was asked to produce these fabricators, which it failed to do so. He pointed out that all the three bills from (1) Raghavendra Engg. Works, (2) Ramana Engg. Works, and (3) Praveen Engg. Works were entered on 9th March, 2006 and there were discrepancies between invoices and the entries in the books as appearing in p. 7 of the assessment order. Referring to the installation of machinery etc. certificate issued by the Department of Customs & Central Excise, he submitted that nature of the machinery used, specification, etc. was not stated therein. He referred to the fact that the assessee has outsourced its manufacturing activity and argued that the AO has come to this factual conclusion based on the material gathered and the evidence proved that no manufacturing activity has taken place in the assessee's premises for the asst. yr. 2005-06 as there was no machinery.
8. On the issue of job works, he relied on the order of the AO and submitted that major portion of the work is carried out by job works outside the premises of the firm and under such circumstances, it cannot be said that the firm undertook any manufacturing activity on its own during the year.
9. The learned counsel for the assessee Shri G.V.N. Hari, on the other hand, relied heavily on the order of the learned CIT(A) and submitted that a remand report was called from the AO and based on various uncontroverted evidences confirmations/registrations and certificates from various Governmental agencies, the learned CIT(A) has rightly come to the conclusion that the assessee was in possession of the plant and machinery during financial year 2005-06 and that the assessee has, in fact, manufactured herbal products during that financial year and, hence, its claim of deduction under s. lOB was to be allowed. He filed paper books and took us through several pages therein to prove his point on the issue of installation of machinery, commencement of manufacturing activity and also the percentage of job work, offloaded job work. He referred to para 4.9 of the learned CIT(A)'s order and submitted that percentage of job work charges in total manufacturing expenses comes to 21.27 per cent and, thus, the conclusion of the AO that no manufacturing activity was carried out by the assessee is factually incorrect.
9.1 He relied on the following decisions for the proposition that getting a part of manufacturing done on job work basis does not in any way affect the claim of deduction under s. lOB:
1. ITO us. Techdriue India (P) Ltd. (2009) 122 TTJ (Del) 264 : (2009) 21 DTR (Del) 52 : (2010) 124 ITD 249 (Del)
2. CIT us. Continental Engines Ltd. (2011) 60 DTR (Del) 40 : (2011) 338 ITR 290 (Del)
3. Taurus Merchandsing p. ltd. vs. ITO (2012) 14:3 n;} (f)el) 1 : (2012) DTR (Del) 48 : (2012) 138 ITD 204 (Del) ,
10. Referring to the issue of whether there is manufacture, he submitted that the AO has accepted Step 1 and Step 2, out of six stages as manufacturing activity. He argued that other 4 steps are also to be considered as manufacturing process.
11. On the assessee's appeal, the learned counsel submitted that reduction of the eligible deduction claim under s. lOB on the groun9 that part of the work is done through job works and hence the profit attributable to such job work is not eligible for deduction is not permissible. He relied on the decision of Tribunal, Mumbai Bench in the case of Gebbs Infotech Ltd. vide ITA No. 3370 and others,dt. 13th Oct., 2010 for this proposition. He emphasised that the direction given by the CIT(A) to the AO to compute profit on the turnover done through job work and exclude the same while computing the eligible deduction under s. lOB, is legally incorrect. On the issue of reopening, the learned counsel for the assessee reiterated his contentions made before the CIT(A).
12. The learned Departmental Representative Shri K.V.N. Charya controverted the arguments of the assessee and submitted that profits attributable to the turnover done through job work is not eligible for grant of deduction under s. lOB. On the issue of reopening, he relied on the order of the first appellate authority.
13. We have heard the rival contentions, perused the material on record and gone through the orders of the Revenue authorities as well as the case law cited. On a careful consideration of the facts and circumstances of the case, we hold as follows :
14. On the issue whether the unit was actually in existence in the previous year relevant to assessment year and whether it started manufacture and process of herbal extracts, the learned CIT(A) at paras 13 to 13.8 of his order held as follows:
"13. Whether the unit was actually in existence in the previous year and whether it had started manufacturing the products (herbal extracts)?
13.1 The appellant has been recognized as a 100 per cent EOU and authorised to manufacture herbal extracts as per statutory approvals duly given by VSEZ. The appellant has purchased machinery to the tune of Rs. 1,07,31,482 during the year, which includes machinery purchases of Rs. 99,77,802 and labour charges of Rs. 7,53,680. To verify the genuineness of the expenditure claimed on account of machinery purchased, the appellant was asked to produce original bills along with evidence of payment for purchase of machinery. The appellant had produced the entire set of invoices relating to machinery and the relevant payment details which show that the machinery has been purchased on various dates during the previous year and the payments towards the same have been done through banking channels. An extract of machinery purchased, where the individual items exceed Rs. 5 lakhs each during the year are given below:
| S.No |
Name of the vendor |
Inv No |
Date |
Amount |
Name of the
Bank |
Cheque
No. |
1 |
Shreyans Metal (India) |
37 |
16.05.2005 |
7,50.589 |
HDFC. Vja |
448312 |
2 |
Jaypee Steel |
3194 |
8.06.2005 |
5.57.700 |
HDFC |
448306 |
:l |
Padrnini Steels |
7 |
1.06.2006 |
10.64.596 |
HDFC |
448307 |
4 |
Steel Fab |
368 |
23.07.2005 |
6.68.304 |
HDFC |
448315 |
:i |
S.R Industries |
36 |
26.03.2006 |
16.31.250 |
HDFC |
660058 |
G |
S. R Industries |
37 |
28.03.2006 |
11.81.250 |
HDFC |
555987 |
13.2 As seen from the above, the machinery has been purchased on various dates, including as early as on 16th May, 2005. There have been regular purchases of machinery throughout the year. As per the invoices, there is no indication that the machinery is a used or old machinery and therefore, has to be presumed only as a new machinery.
13.3 In the assessment order, the AO has stated that information under s. 133(6) of the Act was called for by the Dy. Director of IT (Inv.), dt. 16th Oct., 2009 from 3 labour contractors Le. Praveen Engineering Works, Raghavendra Engineering Works and Ramana Engineering Works, who were partly involved in fabrication of machinery. The Inspector who was authorized to serve the notices, could not serve the notice and gave a report that there are no such parties and no such addresses. The appellant had contended that the due to long efflux of time of about 4 years, the fabricators being small contractors might have closed their business and moved away. However, subsequently confirmation letters were filed by 3 persons representing the above labour contractors. An extract of letter received from Sri K.L.V. Ramana, filed before the AO and placed in the assessment folder is given below:
"To
The Asstt. CIT, Circle I, Vijayawada.
Dear Sir,
Sub: Fabrication and erection of SS304, 3KL Reactors-Reg.
I am a Qualified Mechanical Engineer with B. Tech Degree. I worked as a Mechanical Engineer on salary basis in Mis Sri Srinivasa Fabricator, Vijayawada, Autonagar during the year 1997-2003. After closure of the firm due to the expiry of the proprietor, I wanted to establish my own fabrication unit by procuring orders. I kept an office at Hyderabad and tried to get the orders.
During this period, M/s Laila Nutraceuticals gave me an order to fabricate 2 Nos. 01 3KL ReacLors, 2 nos. of condenser shells and receivers. The material for the above work was supplied by the customer and I was paid only labour charges for the above work.
My work is to procure labour and to fabricate the equipment. Accordingly, I provided the labour and executed the work at the premises of the customer M/s Laila Nutraceuticals, VJA and erected the equipment. For the above work, I was paid an amount of Rs. 2,31,500 as labour charges after completion of the work. Even though my office is at Jeedimetla, I used to work at the respective work sites.
Since the margin of the profit was not adequate even to meet the labour payments and heavy competition, labour and lack of orders I could not able to withstand in the business and stopped my activities in the year 2006. Hence, I am not available at Jeedimetla since that time.
Presently I am dealing in real estate transactions and touring around Hyderabad, Vizag and Vijayawada.
What is stated above is true to the best of my knowledge and belief.
Yours faithfully, (K.LV. Ramana)
939223913." 13.4 Further confirmations were filed before the AO by Mr. V. Venkateswarlu and Mr. G. Chittibabu, - confirming their roie in installation of machinery in the premises of the appellant. The concerned letters are in the assessment folder. Though, the parties have clearly confirmed that they have carried out the labour works and also provided their mobile numbers, yet, no further enquiries were done by the AO, who merely relied on the report of the DOlT (Inv.) , which questioned the installation of machinery on the ground that letters written under s. 133(6) of the Act to three of labour contractors, were 'returned unserved'.
13.5 As mentioned above, the payments for purchase of machinery have been made through banking channels and the machinery have been purchased at various periods of time, right from the first quarter of the financial year. It is unlikely that the machinery which has been purchased over the period would have been kept unutilized and no activity taken up thereon. Further, it should be noted that confirmation letters from machinery suppliers have been filed and no doubt has been expressed in the assessment order as regards their genuineness. In absence of contrary evidence, it can be reasonably presumed that the machinery has been installed and utilized during the year. This apart, there are other evidences, which clearly go to show that the machinery has in fact been purchased and utilized during the year, such as the following:
(I) Inspection report dt. 6th Oct., 2005 from Superintendent of Central Exicse & Customs, Range-IV, Vijayawada, addressed to the Development Commr., VSEZ, confirming the installation and utilization of the machinery in the premises of the appellant at Shed Nos. 6 and 7, PhaseIII, Jawahar Autonagar, Vijayawada. An extract fir the letter is reproduced below;
'Office of the Superintendent of Central Excise & Customs, Range-IV, C.R. Buildings, M.G. Road, Vijayawada-2.
a.c. No. 618/2005
dt. 6/10/2005
To
The Development Commr., VEPZ Duvvada, Visakhapatnam
Sub: Intimation of inspection report-Reg.
Ref.: Your L.O.P. No. 273/EOU/VSEZ/2005, dt. 22nd March, 2005 of M/s Laila Nutraceuticals.
With reference to th'e above, it is to inform you that, we have inspected the premises of M/s Laila Nutraceuticals, registered under 100 per cent Export-Oriented Unit situated at Shed Nos. 6 and 7, Phase III, Jawahar ... Autonagar, Vijayawada-7 and physically verified the erected machinery at the time of inspection as follows:
1. Reactors 3 Nos.
2. Filters 3 Nos.
3. Calendria 1 No
4. Drier 1 No
5. Pulverizer 2 Nos.
6. Siever 2 Nos.
All the above machinery has been installed and commenced the manufacturing operations on 5th Oct., 2005.
This is for your kind information.
Yours faithfully, Sd/Superintendent Customs & Central Excise
Range IV, Vijaya Wada Copy submitted to the Asstt. CIT, C. Ex, Vijayawada for information.
Copy to M/s Laila Nutraceuticals, Shed Nos. 6 and 7, Jawahar Autonagar, Vijayawada.'
(ii) A copy of the above inspection report was sent to the DDIT (Inv.), Vijayawada, vide letter dt. 30th Nov., 2009 from Asstt. Commr. of Customs, Central Exeise & Service-tax, Vijayawada, conlirmlng the erection and utilization of the machinery from 5th Oct., 2005.
(iii) Permission letter for manufactllre of herbal extracts under EOU scheme dt. 22nd March, 2005 from Development Commr., VSEZ.
(iv) Central Excise Registration Certificate dt. 6th Oct., 2005.
(v) Inbond manufacturing sanction order dt. 6th Oct:, 2005 from the Asstt. Commr. of Customs and Central Excise, Vijayawada.
(vi) Certificate of Importer-Exporter code (IEC) Number dt. 9th Sept., 2005 from Development Commr., VSEZ.
(vii) VAT Registration Certificate w.e.f. 1st April, 2005 from Commercial Taxes Department, Government of Andhra Pradesh.
(viii) Letter dt. 20th Oct., 2009 from Asstt. Development Commr., VSEZ, certifying the commencement of production on 5th Oct., 2005. An extract of the said letter is given below :
'Government of India
Ministry of Commerce & Industry Office of the Development Commissioner Visakhapatnam Special Economic Zone Administrative Building, Duvvada Visakhapatnam-530 046 A. p. (India) Ph. : 0891-2587382 Fax:0891-2587352
No. 8/EOU/322/Vsez/2009/0631 dt. 20th Oct., 2009
To whom it may concern
This is to certify that M/s Laila Nutraceuticals, a 100 per cent Export Oriented Unit at Sy No. 484, D.No. 54.11.9, Phase-II, Shed Nos. 6 & 7, Jawahar Autonagar, Vijayawada-530 007 and additional location at Sy. Nos. lSlj4B, 181j3, 181j2, JRD Tata industrial Estate, Kanum Village, Autonagar, Vijayawada-7, manufacturers and exporters of Herbal Extracts had commenced production on 5th Oct., 2005 and effecting exports.
This is issued to the unit as desired to further submit the same to IT authorities :
Sd/(B. Raja Babu) Asstt. Development Commissioner
To
Mjs Laila Nutraceuticals, 40-15-14, Brindavan Colony,
Vijayawada 520 0 10'
(ix) Certificate of Licence to manufacture Ayurvedic Drugs received from Department of Ayurveda, Yoga & Naturopathy, Unani, Siddha and Home (AYUSH), Govt. of Andhra Pradesh.
(x) Certificate of Good Manufacturing Practice dt. 31 st Dec., 2005 received from Department of AYUSH, Government of Andhra Pradesh.
(xi) Annual permission dt. 14th Oct, 2005 to send goods to M/ s Laila Impex for job work received from Asstt. Commr. of Customs & Central Excise, Vijayawada.
(xii) ESI Inspection Report dt. 3rd April. 2006 confirming engagement of labour in manufacturing and sale of herbal extracts at the appellant's unit.
13.6. In view of the substantial evidences from various Governmental Departments above and further in view of the fact that the confirmations letters have been filed with regard to the machinery purchased and the payment having been made through banking channels, I have no hesitation in holding that the' machinery has been installed and manufacturing activity was undertaken during the previous year relevant to the asst. yr. 2006-07, at the premises of the appellant.
(Emphasis, Italicized in print, ours) 13.7. Further, on examination of the balance sheets of Mjs Laila Impex for the earlier years, including the assessment year under consideration, it is seen that no portion of the plant a~d machinery has been transferred to the appellant's unit or any other unit by way of sale, transfer or any other mode. This is evidenced by the fact that there are no deletions in the plant and machinery account in the balance sheet of M/ s Laila Impex. In fact, there is no other evidence whatsoever, which indicates that the machinery installed in the appellant's premises is not a new machinery. In view of the same, the AO is not justified in making contextual reference to the appellant by his observation in p. 9 of the assessment order that "100 per cent EOU should be a new business unit entity and not a clone of existing business. In other words, it should not be like old wine in new bottle:
13.8. In view of the above, I would hold that the appellant has installed machinery and commenced operation during the previous year relevant to the asst. yr. 2006-07 and the plant and machinery installed is a new plant and machinery, which has not been hitherto utilized."
15. We agree with these factual findings of the learned CIT(A). These factual findings are so clear that we need not repeat or further elaborate on them. Any how we enumerate some of them.
(a) There are many licenses issued by the Governmental authorities in the name of the assessee firm and the agencies confirm installation and commencement of manufacturing.
(b) Inspection was conducted by the Asstt. Commr. of Central Excise and Customs and the machinery is certified as having been installed and manufacturing activity commenced on 5th Oct., 2005.
(c) The District Development Commr. of Visakhapatna Special Economic Zone certified commencement of manufacturing activity on 5th Oct., 2005.
(d) Out of the total machinery of Rs. 1,07,31,482. machinery to the extent of Rs. 99,77,805 was purchased by issue of account payee cheques and the AO or the Dy. DIT (Inv.) have not raised any questions in this regard.
(e) The factum of purchases are not in dispute. On the balance of Rs. 7,53,680 confirmation letters were filed before the DIT (Inv.)
(0 No part of the machinery from the sister concern M/ s Laila Impex was transferred to the assessee as evident from the examination of the balance sheets.
(g) All the six steps involved in the manufacture of herbal extracts as listed out at para 3.2 of the assessment order at pp. 5 and 6 are part of the manufacturing activity. The conclusion of the AO that only 2 steps involved in manufacturing activity and that remaining 4 stages Le. drying, powdering, sievenge and packaging are not part of manufacturing activity, is not factually correct.
(h) The AO records that only step 1 of the manufacturing process Le., process of solution, was outsourced and that step 2 to step 6 were carried out by the assessee itself. It is well settled that when the assessee is entitled to outsource part of the manufacturing activity on job work basis it is eligible for claim of deduction under s. lOB of the Act.
16. These factual recordings by the CIT(A) could not be controverted by the learned Departmental Representative with evidence. The inferences drawn by the Dy. DIT (Inv.), which are reflected in the assessment order, are devoid of merit. Thus, we uphold these findings of the learned CIT(A) and dismiss ground Nos. (a) to (g) of the Revenue's appeal.
17. Ground Nos. (h) to (k) are on the issue of outsourcing of manufacturing activity on job work basis to M/ s Laila Impex.
18. The learned CIT(A) , has at paras 14 to 14.6 held as follows:
"14. 'Whether outsourcing part of the production process by way of job work anwunts to 'manufacture' by the appellant?
14.1 Part of the work comprising of the entire first stage of manufacturing was given by way of job work by the appellant to M/ s Laila Impex. The AO has held that the appellant has contravened the provisions of cl. (aHii) of Chapter 6.14 of the Foreign Trade Policy, which states that the units may contract upto 50 per cent of overall production in value terms in Domestic Tariff Area (DATA) with permission of Chapter 6.14 of FTP is applicable in its case and not cl. (aHii) of FTP as held by the AO.
14.2. Cl. (bHiii) of Chapter 6.14 of FTP reads as under:
'(iii) Subcontracting of both production and production processes may also be undertaken without any limit through other EOU IEHTP ISTP I SEZ/BTP units. on the basis of records maintained in unit.'
14.3. In course of the appeal proceedings. the appellant has filed certificates of both itself anzt Mis Laila Impex to the effect that they are recognized as 100 per cent EOUs and has also stated that complete records in both units regarding the job work are maintained, duly verified by the concerned authorities of Central Excise/SEZ. from time to time. Therefore. I am in agreement with the contention of the appellant that sub-cl. (b)(iii) of Chapter 6.14 of FTP are applicable in its case.
14.4. The manufacturing process of the appellant involves the following stages:
(a) Process of Solution
(b) Process of Concentration (c) Process of Drying
(d) Process of Pulvarisation (e) Process of Sieving
(1) Process of Packing
14.5. Each of the above processes have beEn dealt with in detail in the written submissions filed by the appellant, which have been reproduced in the preceding paras. The first stage of the manufacturing process is carried out by M/s Laila Impex, on job work basis. The remaining 5 stages are carried out by the appellant in its premises.
14.6. Unless all the activities in the first 5 stages are carried out. the manufacture of the finished product cannot be said to be completed in the appellant's case. Even the 6th stage of packing in the appellant's case is a necessary adjunct to the process of manufacture. in as much. as the packing would have to be specialized keeping in view the need for long preservation and quality requirements in export process and the t attendant disclosures regarding product as required under local laws in the country to which the product is exported.
19. Thereafter, at paras 14.10to 14.11, the learned CIT(A) held as follows: '14.9. The AO has held that substantial portion of the manufacturing activity has been outsourced by taking into account the ratio of the manufacturing expenses and the manufacturing establishment expenditure to the amount of job work outsourced to M/s Laila Impex. Accordingly, He held" that around 90.4 per cent of total manufacturing expenses has been paid to M/s Laila Impex. Similarly, with regard to manufacturing establishment expenses. he has held that 91.1 per cent has been incurred by M/s Laila Impex. The expenditure has been subsequently reimbursed to M/ s Laila Impex. The appellant has contested the findings' stating that the actual ratio regarding manufacturing expenses should be calculated based on the complete expenditure involved. including raw material and incidental expenditure and has accordingly arrived at the following ratio:
(Rs. In crores)
Description |
Paid by
appellant
directly |
Reimbursed
to M/s Laila
Impex(Job
work) |
Total |
Raw Materials |
7.72 |
0.00 |
7.72 |
Chemicals |
6.01 |
0.00 |
6.01 |
Packing materials |
0.58 |
0.00 |
0.58 |
Fuel and power |
0.58 |
0.07 |
0.65 |
Manufacluring expenses |
4.51 |
0.]4 |
4.65 |
Manufacturing establishment |
0.16 |
0.02 |
0.18 |
Total |
19.56 |
0.23 |
19.79 |
% of reimbursement |
|
|
1. ]6% |
Job work charges included in Mfg. expenses |
|
|
4.21 |
% of Job work charges in total Mfg. expenses |
|
|
2] .27% |
14.10 While working out percentage of job work to manufacturing expenses. it would be logical to include entire manufacturing cost. comprising of raw materials. chemicals, packing material. fuel and power, manufacturing expenses and manufacturing establishment. since all these expenditure constitute the actual manufacturing expenditure incurred. This is all the more required since the entire raw material. chemicals and packing material and part of the other expenditure is directly incurred by the appellant itself. The raw material and chemicals are purchased by the appellant and then later given for job work. Therefore, it would stand to reason that while working out percentage of job work expenditure to total manufacturing cost, the entire manufacturing cost including raw materials. chemicals etc .. should be taken into account. In this context, as mentioned above. only the first stage of manufacturing i.e. the 'process of solution' has been given on job work to M! s Laila Impex and all the other stages of manufacturing process, including the process of concentration, process of drying, process of pulverizing. process of sieving and process of packing are done by the appellant itself. However. as held by various judicial pronouncements mentioned in the preceding paras, the appellant is not precluded from carrying out the part of the stage of manufacturing through job work.
14.11 Apart from the above, the appellant contended that the power and fuel expenditure has larger component of diesel. which is mandated by frequent power cuts, necessitating use of generator for manufacturing activities. Though, the AO has commented on this issue in the assessment order, he has not brought out any evidence to show that generator has not been utilized for manufacturing processes by the appellant. Therefore. since the generator expenditure has been incurred exclusively by the appellant and form significant part of the total expenditure on power and fuel. it can be presumed that the same has been utilized during the manufacturing activity in the last 5 'stages' carried out by the appellant."
20. These factual findings could not be corttroverted by the learned Departmental Representative. In our view, the AO erred in considering only manufacturing expenses for the purpose of arriving at ratio of outsourcing by way of job work of manufacturing activity. This is illogical. The learned CIT(A). in our view, has correctly considered raw material cost, cost of chemicals. packing materials, fuel and power, manufacturing expenses as well as manufacturing establishment expenses as total cost of manufacturing and the amount paid towards job works as a percentage of this expenditure and thereafter arriving at 21.27 per cent as the percentage of job work that was outsourced from the total manufacturing cost. This demonstrates that the conclusion of the AO that major portion of manufacturing activity is not conducted in the assessee premises, is factually incorrect. In fact Laila Impex is also an EOD. Thus, we uphold these findings of the first appellate authority and dismiss the grounds raised in this regard.
21. In the result, appeal of the Revenue is dismissed.
22. We now take up the assessee's appeals.
23. On the issue of directions otthe learned CIT(A) to the AO to compute the profit of 21.27 per cent of the turnover, as the same is attributable to the outsourcing of manufacture through job works and, then to exclude such profits from the profits eligible for deduction under s. lOB, we hold that the same is contrary to law. No such exclusion is contemplated in the Act. We are supported by the propositions laid down by the Mumbai Bench of Tribunal in the case of Jt. CIT us. Gebbs Irifotech Ltd. vide ITA Nos. 3370 & 7738/Mum/07 and 7196/Mum/08 for asst. yr. 2003-04 to 2005, order dt. 13th Oct., 2010, wherein it was held as follows:
"The ground No. 3 is that 'on the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the AO in not allowing deduction under s. lOB of the Act on proportionate amount worked out at Rs. 1,74,34,738.'
15. Coming to ground No.3, the AO observed that the payments of Rs. I :um,Hr)O was made 10 certain companies on account of Job work and concluded that as the assessee is not a manufacturer to that extent, the exemption under s. lOB should be worked out on proportionate basis. The learned Departmental Representative submitted that what was got done by the assessee by (of) loading certain works to job work contractors, is an intermediate product. He contends that what was given by the job work contractors was an end product by itself. He submits that the product is a module by itself and not a part of overall module. On a query from the Bench, he submitted that in a software industry the full work for development of software is undertaken by one developer. He relied on the order of the AO and submitted that the AO's finding that the assessee should get proportionate deduction is to be upheld.
16. The learned counsel for the assessee, on the other hand, submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis. He contended that the software development cycle consists of more than 20 different parts and only part of the software development was outsourced. He relied on the decision of Hon'ble Bombay High Court in the case of CIT us. Penwalt India Ltd. (1991) 96 CTR (Bom) 20 : (1992) 196 ITR 813 (Bom) as well as on the decision of the Hon:ble Bombay High Court in the case of CIT us. Neo Pharma (P) Ltd. (1982) 28 CTR (Bom) 223 : (1982) 137 ITR 879 (Bom). Similarly he relied on the decision in the case of CIT us. Anglo French Drug Co. (Eastern) Ltd. (1991) 95 CTR (Bom) 1 76 : (1991) 191 ITR 92 (Bom).
17. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we are of the considered opinion that the order of the first appellate authority on this issue has to be upheld for the following reasons.
18. Nowhere in the assessment order, the AO has given a finding, that what is got by the assessee from the job work contractors is a product by itself. The assessee had in fact contended before AO that only a part work was done through job work contracts. The AO, in our considered view, was wrong in coming to a conclusion that in the case of manufacture of software, no part job can be outsourced, as in the case of other manufacturing activities. Out of a total receipt on account of sale of software of Rs. 13.11 crores, the outsourcing billing was Rs. 1.36 crores. A software product contains within its numerous sub-software programmes which are integrated. On these facts we uphold the following finding of the CIT(A):
'As has been stated in the earlier part of the order, deduction under s. lOB is to be allowed on such profits and gains which are derived from the undertaking and which fulfills different parameters. It got's, without dispute in the case of the appellant that the unit is a 100 per cent export unit and the profits and gains derived pertain to such exports. It is not the requirement of the section that the deduction which have been claimed in the case of an assessee is not admissible where a part of the software development programme has been carried out as job work by other parties. It is not the case of the AO that the deduction has been claimed by the appellant on the export of software which has been manufactured by other independent concerns and entities and that the appellant has included the export proceeds generated out of such software programmes which do not belong to it and on which it had claimed exemption under s. lOB of the IT Act. No evidence has been brought on record by the AO in this regard. The fact is that the appellant through its 100 per cent export unit exported computer software and the profits on which deduction has been claimed is derived from the unit/undertaking. If part of the work has been done by outside parties, it cannot be concluded that the profit has not been deriued by the appellant from the undertakin.g. It is not in dispute that the entire profit of 100 per cent is only out of the export undertaking. Under the circumstances, the stand of the AO cannot be sustained. This ground is therefore allowed in favour of the appellant.'
19. We also hold that this decision is in line with the judgment of the jurisdictional High Court in the case of CIT us. Penwalt India Ltd. (1991) 96 CTR (Bom) 20: (1992) 196 ITR 813 (Bom)."
(Emphasis, Italicized in print, ours) 24. Consistent with view taken by the Tribunal, we uphold (sic-vacate) the directions of the learned CIT(A) as in this case also, what was outsourced was a part of the job of manufacturing i.e. step lout of the 6 steps or stages of manufacturing activity.
25. As regards cross-objections filed by the assessee, we find that they are in support of the order of CIT(A).
25.1 The AO in other years has simply followed his order for asst. yr. 2006-07. He held that if exemption is not allowed for asst. yr. 2006-07, the balance exemption cannot be allowed in the subsequent years. Thus, our decision for the asst. yr. 2006-07 applies for all other assessment years.
25.2 In view of our decision in asst. yr. 2006-07, there Is no need to separately dispose of these cross-objections. In the result, the same are dismissed as infructuous.
26. In the result, all the Revenue appeals are dismissed, assessee's appeals are partly allowed and the cross-objections filed by the assessee are dismissed.