Conclusion: Deduction u/s 80IA eligible when herbal product is manufactured from herbs, manually and with the use of some chemicals and small machinery.
Facts: Assessee is engaged in converting herbs into herbal powder which involves processing of drying of herbs, fumigation, grinding & sieving, blending, quality control and packing. Benefit u/s 80IA was denied to the assessee alleging that they were not engaged in any activity of manufacture or production. Further it was also alleged that the electricity consumption was also lower.
Held : The manufacture of herbal product by a manual process with the use of some chemicals and small machinery can also amount to manufacture or production of a different commercial article which is the basic requirement under Section 80IA of the Act. The purpose of the said provision is to encourage industrialization and investment in an industry. The purchase of plant and machinery, and consumption of electricity are not mandatory requirement.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
The Revenue has filed these Appeals under Section 260-A of the Act raising the following purported substantial questions of law arising from the order dated 25th January 2008 passed by the learned Income Tax Appellate Tribunal allowing the Assessee’s Appeal for the Assessment Years 1996-1997, 1997-1998 & 1998-1999 and holding that the Assessee is entitled to avail the benefit of deduction under Section 80IA of the Act:-
“1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the Assessee was entitled to the benefit of Section 80IA when there is a concurrent finding of fact by both the Lower authorities that there was no new industrial unit, machinery or infrastructure as claimed?;
2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the Assessee was entitled to the benefit of Section 80IA even if it does not do the manufacturing process on its own but gets it done by third parties?;
3. Whether on the facts and circumstances of the case, the Tribunal was right in deleting the additions on account of inflated purchase price, when there is a concurrent finding of fact by both the lower authorities that the Assessee had adopted a devious method of buying back its own manufactured product at an inflated
price for use as raw materials in its herbal shampoos?”.
“11. We have considered the rival submissions carefully in the light of the material on record. We find that the CIT (Appeals) has admitted that the Assessee was in the business of manufacturing, because the entire process of converting raw material ie., Herbs into finished goods ie., Herbal power which has a different use constitutes manufacturing activity (page 5 of the CIT (Appeals)’s order refers). For manufacturing Bandruff the following process are required to be done:-
1. Drying of Herbs
3. Grinding & sieving
5. Quality Control
12. First of all, the crude country drug herbs are collected and dried in a shed to remove the moisture. The herbs are dried in the sun and for which no electricity is consumed. Later on such dried herbs are made free from extreneous materials. Then the herbs undergo fumigation in a Fumigation Chamber. The fumigation process goes on for 24 hours, which is done by use of chemicals through manually operated machines. After it is processed, the herbs are subjected to grinding separately to a find powder in a mill and this process is carried out on job work basis. Such grinded powder is then sieved at 120 mesh size which is also carried on manually. Later on, the sieved power is blended and again sieved at 40 mesh sieve and such final product is known as Bandruff which is sold in the market for further process of adding perfume by the buyers of this product. It is seen from the manufacturing process that most of the
processes do not require much electricity.
Therefore, there is no force in the contention of the Assessing Officer that electricity consumption was lower, for denial of deduction under Section 80IA. It is also seen that some of the processes are got done from outsiders. Even then deduction cannot be denied in view of the decision of the Tribunal dated 26th October 2005 in the case of DCIT v. Elgi Ultra Industries Limited., in Income Tax Act, 1961 No. 1631, 1789 7 1790/Mds/2003, wherein vide para 6 of the order, it was held as under:-
“After considering the rival submissions carefully and relevant material on record as well as orders of the lower authorities, we find that the conclusions arrived at by the id. CIT (Appeals) are correct. It is clear from his order that the Assessee had established a brand name “Elgi Ultra” and the same had been developed by the Assessee company and continuous research and development was being carried on in this respect. The Assessee company had also done procurement of component and required raw material under its own strict supervision. The dyes and moulds were supplied by the Assessee company and quality control and supervision was also ensured at all levels. We further find that assembling was done through labour contractors, but still supervision and quality control was being monitored by the Assessee company. Marketing and after sales services of the product was also being provided by the Assessee company.
According to us, the id. CIT (Appeals) has correctly followed the decision of the Hon’ble Bombay High Court in the case of CIT v. M/s. Pentwalt India Ltd. (196 ITR 813)(Bom.), wherein it was observed as follows:-
‘an Assessee would be said to be engaged in manufacturing activity if he is dong a part of the manufacturing activity by himself and for the rest of it, engages in the services of somebody else on a contract other than a contract of purchase.
The Assessee canvassed orders for supplying, erecting and commissioning sugar and tea machinery. The Assessee’s activity consisted of (i) Canvassing of orders (ii) preparing of designs and drawings on the basis of orders (iii) placing orders for the manufacture of machinery with TH (iv) to see that the manufacturing process is carried on by TH under the direct supervision of the Assessee company (v) to have a check over the quality control and to be responsible for the proper functioning of the machinery, and guarantee after sale service for a stipulated period. The Assessee claimed special deduction under Section 80-I of the Income- tax Act, 1991.
Thus, we are of the opinion that CIT (Appeals) has correctly allowed the deduction under Section 80-IA and therefore we confirm the findings arrived at by the id.CIT (Appeals).”
13. In the case before us, fumigated herbs were given for grinding and sieving purposes through job work and on that account deduction cannot be denied. As far as the allegation that no such factory was in existence does not hold ground because the Assessee has obtained permanent registration certificate issued by the Department of Industries and also bought the licence under the Drugs and Cosmetics Act, Registration under Central Excise Department, No objection from Pollution Control Department, clearance from Municipal Authorities, permission under the Factories and Boilers Act, Site clearance from Town & Country Planning Department and approval of Pondicherry Planning Authority. The Inspector’s report cannot be accepted in contrast to the approval from various authorities which was obtained by the Assessee. In these circumstances, we set aside the order of the CIT (Appeals) and direct the Assessing Officer to allow deduction under Sec. 80-IA for the Assessment Year 1996-97 and 1997- 98. We again clarify that the claim of deduction under Sec.80-IA has not been pressed for the Assessment Year 1998-99 before us and therefore, no such claim should be allowed for the Assessment year 1998-99.”
4. The learned counsel for the Appellant/ Revenue submitted that the learned Assessing Authority has found a personal inspection of the factory premises that the Assessee had neither purchased any new plant or machinery nor did it have a factory as such and that most of the work was carried out manually and therefore, the Assessee was not entitled to the said deduction under Section 80IA of the Act.
5. On the other hand, the learned counsel for the Assessee supported the impugned order of the Tribunal.
6. Having heard the learned counsel for the parties, we are satisfied that no question of law arises in the present case requiring our further consideration under Section 260-A of the Act.
7. The manufacture of a herbal product Bandruff by a manual process with the use of some chemicals and small machinery can also amount to manufacture or production of a different commercial article which is the basic requirement under Section 80IA of the Act. The purpose of the said provision is to encourage industrialisation and investment in an industry. The purchase of plant and machinery, and consumption of electricity are not mandatory requirement as was thought by the learned Assessing Authority in the present case. The learned Tribunal after describing the said manufacture / production process of the herbal product was, in our opinion, perfectly justified in holding that the same amounted to manufacture of a different commercial article and that therefore, the Assessee was entitled to the deduction under Section 80IA of the Act. The Appeals of the Revenue have no merit and are liable to be dismissed. Accordingly, the Appeals filed by the Revenue are dismissed. No costs.