Case Law Details

Case Name : M/s. Intergarden (India) P. Ltd. Vs ACIT (ITAT Bangalore)
Appeal Number : I.T.A No.1292/Bang/2010, I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013
Date of Judgement/Order : 18/03/2016
Related Assessment Year : 2006-07 & 2007-08
Courts : All ITAT (1730) ITAT Bangalore (63)

Brief of the Case

I.T.A No.1292/Bang/2010

ITAT Bangalore held in the case of M/s. Intergarden (India) P. Ltd. vs. ACIT that Revenue has not disputed the fact that effective rate of interest paid by assessee in India was 6.62% on loans whereas  Interest paid by assessee on loans taken from AE abroad was 5%. This was below the rate of interest assessee was paying on loans taken within India. When internal CUP with unrelated parties is available, it should be given precedence over external CUP. We are of the opinion that no adjustment ought to have been done on the interest paid by the assessee to the AE abroad. Hence addition of Rs.2,99,908/- stands deleted.

Facts of the Case

I.T.A No.1292/Bang/2010

This appeal filed by the assessee directed against an order dt.20.09.2010 of the Assessing Officer for A. Y. 2006-07, passed in pursuance to directions of DRP u/s.144C. Assessee has altogether taken ten grounds. Vide its ground 6, assessee is aggrieved on disallowance of a portion of interest on borrowings made by it from its AE. Assessee had External Commercial Borrowings (ECB) of Rs.8,13,19,000/- from its AE abroad.  TPO was of the opinion that the interest paid by the assessee on such loans came to 5% and this was excessive.  As per the TPO, on applying CUP method on ECB loans, interest rate would be 3.87% only.  For the difference of 1.13%, he recommended an adjustment of Rs.2,99,908/-.

I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013

The assessee filed its return for AY 2007-08 declaring income of Rs.1,38,04,710/- after claiming deduction u/s.10B of Rs.7,18,79,252/-. Assessee claimed such deduction considering it to be manufacturer and producer of gherkins pickles. There was a survey done by the Income-tax Authorities in the premises of the assessee on 27.09.2010. Based on the inputs received from the survey, AO put the assessee on notice as to how it could be considered as doing any manufacturing.  According to the AO, assessee was only into processing of the gherkins obtained from the farmers through contract farming.  As per the AO, assessee was having a packing unit, where gherkins obtained from farmers were washed and put into jars of various sizes with some preservatives and some spices.  AO noted that the jars were steam heated for 20 minutes and labelled with prints, depending on the country of export.  As per the AO such exercises could not be considered as manufacture or production for allowing a claim of deduction u/s.10B.

Contention of the Assessee

I.T.A No.1292/Bang/2010

The ld counsel of the assessee strongly submitted that there was no dispute regarding commercial CUP rate of 6.62%.  According to him, when internal CUP method was available, there was no need to apply external CUP Method.

I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013

The ld counsel of the assessee strongly assailing the orders of lower authorities submitted that letter dt.29.05.2001 of Development Commission of Cochin SEZ had not only considered assessee to be a manufacturer but also gave it permission to work in the SEZ as a  100% Export Oriented manufacturer of gherkins. Ld. AR submitted that Board of Approval of EOU Scheme falling under Ministry of Commerce, Government of India vide letter dt.18.01.2011, had approved various EOU schemes including that of the assessee. Thus according to him, assessee had fulfilled the conditions set out in Explanation 2(iv) to Section 10B.

He further submitted that flow-chart of the various steps undertaken by the assessee in the production of gherkins pickles were submitted before the AO but was not properly considered.  According to him, AO simply went by a statement recorded from the Director of the assessee company during the course of survey which did not have any evidentiary value.  As per the Ld. AR, one of the steps involved was fermentation, which clearly brought out a change in the state of gherkins. Raw gherkins due to this process, became something which had a long storage.  Relying on the judgment of Hon’ble Kerala High Court in the case of Tata Tea Ltd. [(2011) 338 ITR 0285], Ld. AR submitted that the term ‘manufacture’ in relation Section 10A, 10AA and 10B of the Act, had to be construed with reference to the definition of such term as given in export / import policy.  Such definition took into its fold any type of process which brought into existence a new product.  According to him in the case of Tara Agencies (292 ITR 444) of Hon’ble Apex Court relied on by the AO related to blending of tea.  As per the Ld. AR, blending of tea was an altogether different process, when compared to what assessee was doing here.  Ld. AR also pointed out that for the earlier years assessee was granted such deduction u/s.10B of the Act and Revenue had taken a different view for only one year without any specific change in circumstances.  Thus according to him assessee was eligible for deduction u/s.10B.

Contention of the Revenue

I.T.A No.1292/Bang/2010

The ld counsel of the revenue relied on the order of lower authorities.

I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013

The ld counsel of the revenue submitted that gherkins as bottled by the assessee was not a pickle.  It was raw gherkins packed in tins and bottles.  As per the Ld. AR there was no change in the complexion of the raw gherkins through various processes done by the assessee.  On the aspect of consistency, Ld. DR submitted that during the relevant  previous year,  there was a survey  in which one of the directors of the assessee had stated that it was not engaged in any manufacture and therefore the AO was justified in considering the claim of the assessee afresh.  Ld. DR also relied on Section 10B of the Act as it stood prior to 01.04.2001.  According to her, prior to 01.04.2001, definition of the term ‘manufacture’ included process, assembling or recording of programmes on desktops.   By virtue of the substitution of Section 10B of the Act through Finance Act, 2000, w.e.f. 01.04.2001, the term ‘process’ was taken out of the said section.  In other words according to her, even if we consider that assessee was doing some processing, it cannot be considered as a manufacturer or producer eligible for deduction u/s.10B.  Gherkins prepared by the assessee was not even sliced.  According to her, assessee was only adding certain material for preserving the gherkins.  In her view, even if there was some process it could not be considered as production.

Held by DRP

I.T.A No.1292/Bang/2010

Before the DRP, assessee argued that effective rate of interest paid by assessee on loans taken by it in India was 6.62%, which itself was below the average PLR of 10.89%.  As per the Assessee, rate of interest paid on the loans taken from the AE was only 5%. Thus according to it, if internal CUP was applied, there was no necessity for any adjustment.  However, the DRP refused to interfere with the recommendations of the TPO.

Held by CIT (A)

I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013

CIT (A) after considering the submissions of the assessee was of the opinion that assessee was approved as a 100% EOU as per letter dt.29.05.2001. As per the CIT (A), this letter by the Deputy Development Commissioner of Cochin SEZ did not per se make the assessee eligible for availing deduction u/s.10B of the Act.  As per the CIT (A), ratification by the Board for EOU scheme, in their meeting dt.14.01.2011 would also not help the assessee.   Ld. CIT (A) was of the opinion that assessee could not produce any document or notification to show that Deputy Director of Cochin SEZ, was entitled to notify a person as 100% EOU.

He further opined that assessee also could not show that it was engaged in any manufacture or production.  After going through the various steps carried out by the assessee in its unit, CIT (A) was of the opinion that assessee was not engaged in any processing or manufacturing.  As per the CIT (A), assessee did not treat the raw gherkins with any chemicals, for any change to have happened.  CIT (A) confirmed the finding of the AO that assessee was only packing the gherkins.  Thus he upheld the order of the AO denying the deduction claimed u/s.10B.

Held by ITAT

I.T.A No.1292/Bang/2010

ITAT held that Revenue has not disputed the submission made by the assessee before the CIT (A) that effective rate of interest paid by it in India was 6.62% on loans.  Interest paid by assessee on loans taken from AE abroad was 5%.  This was below the rate of interest assessee was paying on loans taken within India. When internal CUP with unrelated parties is available, in our opinion, it should be given precedence over external CUP.  We are of the opinion that no adjustment ought to have been done on the interest paid by the assessee to the AE abroad. Accordingly, addition of Rs.2,99,908/- stands deleted.

I.T.A No.287/Bang/2013 & I.T.A No.968/Bang/2013

The ITAT held that in process flow chart submitted by assessee, one important process is the fermentation process.  Argument of the AO is that fermenting only extended the shelf-life of the gherkins and had no other effect what so ever.  In any case there is an admission by Revenue that gherkins pickled by the assessee had much higher shelf life than what raw gherkins would have had.  As a raw vegetable, gherkins would not last more than a week.  Once such raw gherkins are put into some process which increases its shelf life to six months or more, there indeed happen some irreversible change. Raw gherkins are changed from its original state to a state where it remains good for human consumption even after six months. Thus the steps as undertaken by the assessee which included fermentation and which extended the shelf life of raw gherkins, even if we construe as not ‘manufacture’, as commonly understood, it cannot be denied that it resulted in a product which cannot be equated with raw gherkins. The processes undertaken by the assessee had significant effect on the raw nature, converting it to a material capable of withstanding decay for a considerable period of time. In our opinion, in such a situation, it is difficult to say that what was packed by the assessee after the various processes was very same as the raw gherkins which it got from its contract farmers.

One another argument taken by the Ld. DR is that even if assessee was doing some sort of processing, still it would not be eligible for claim of deduction u/s.10B of the Act.   In our opinion the effect of substitution of Section 10B by virtue of Finance Act 2000, was an issue which came up before  Hon’ble Kerala High Court in the case of Tata Tea Ltd  (supra).  there was whether assessee who was blending tea could be considered as eligible for exemption u/s.10B of the Act. There also the Department had placed reliance on the Hon’ble Apex Court judgment in the case of Tara Agencies (supra). Their Lordships had considered the effect of substitution of Section 10B of the Act by Finance Act, 2000 w.e.f. 2001.  It had held that for the purpose of Section 10A, 10AA and 10B, what was relevant was the definition of ‘manufacture’ as mentioned in Chapter IX of Export  Import Policy 2002 to 2007, and as mentioned in Section 2(r) of Special Economic Zones Act, 2005.  As per this, judgment for units falling within an Export Processing Zone, Free Trade Zones and 100% Export Oriented Units covered by Section 10A, 10AA and 10B,  what would be relevant is the definition of ‘manufacture’ as mentioned in the Export Import Policy and Special Economic Zones Act, 2005.

Hon’ble jurisdictional High Court in the case of CIT v. Saint Gobins Crystals & Detectors India (P) Ltd [ITA.351 & 352 of 2009, dt.19.01.2015], had held that etymologically the word “manufacture” property construed would cover transformation, when a question regarding applicability of Section 10B to an assembling unit was raised before it.

Coming to the aspect of finding of CIT (A) and AO that assessee was not having the required recognition under CSEZ as a 100% EOU, Office Memorandum (OM), dated.18.01.2011, issued by Ministry of Commerce and Industry of Government of India show that assessee was approved  as an EOU. There is no case for the Revenue that the Board which gave approval mentioned in the above OM, was not one which was appointed by Central Government under IDR Act, 1951.  Assessee was therefore a hundred percent export oriented undertaking. In such circumstances, we are of the opinion that assessee’s claim u/s.10B of the Act, had to be allowed.

Accordingly appeal disposed of.

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