Case Law Details

Case Name : Tonira Pharma Ltd. Vs. ACIT (ITAT Ahemdabad)
Appeal Number : Appeal No: ITA No. 235/Ahd/2007
Date of Judgement/Order : 30/04/2010
Related Assessment Year :
Courts : All ITAT (5373) ITAT Ahmedabad (383)


Tonira Pharma Ltd. Vs. ACIT,

APPEAL NO: ITA No. 235/Ahd/2007,

DECIDED ON April 30, 2010


Per D.C.Agrawal, Accountant Member.

This is an appeal filed by the assessee raising following grounds :-

(1) The ld. Commissioner Income Tax (Appeals)XIX, Ahmedabad (called CIT(A) has erred in denying exemption u/s 10B in respect of profit earned from mfg. Of Ascrobic Acid IP out of Ascrobic Acid FCCIV by treating same as trading activity. (1.1) The ld. CIT(A) further erred in confirming estimation of NP Rs.49,04,792/- i.e.@ 20% on purchase of goods and treating same as trading profit and denied exemption u/s 10B.

(2) The ld. CIT(A) has erred in confirming dis allowance of Rs.15,027/- (20% of Rs.75,135/-) u/s 40A(3) in respect of payments of exps. Other than business promotion exps.

(3) The ld. CIT(A) has erred in confirming addition made u/s 43B in respect of ESIC & PF paid by assessee.

(4) The ld. CIT(A) has erred in confirming dis allowance of Rs.2,78,917/- by restricting claim u/s 35D.

2. The facts of the case are that assessee company is engaged in the business of manufacturing and export of bulk drugs, drugs intermediates, fine chemicals (organic/inorganic) etc. It has two units namely general unit and EOU unit. The assessee had claimed exemption under section 10B of the Act in respect of EOU unit where profit of Rs.2,25,41,679/- was shown. The AO had rejected the claim made under section 10B but was allowed by the Tribunal in ITA No.2469/Ahd/2006 for Asst. Year 2002-03 vide its order pronounced on 12.02.2010.

3. However, during the course of assessment proceedings the AO had noticed that assessee had shown purchases of finished goods of Rs.1,96,19,168/-. These purchases are related to ascorbic acid (Vitamin C). These goods were, as claimed by the assessee, processed and sold as ascorbic acid (vitamin C) and exemption under section 10B was claimed on this amount also. The AO found that the Chartered Accountant has not certified in any manner that the goods were processed. There are also no evidences or details that any processing has been done. The assessee, however, produced a certificate from the C.A. that sales of ascorbic acid IP has been made to the extent of Rs.2,23,89,010/-. The AO, not satisfied with the claim, rejected it and proposed an addition of Rs.49,04,782/- being 20% of the purchases of Rs.96,19,168/-. In this regard, the AO has held that exemption under section 10B is not available on trading activities.

4. The ld. CIT(A) confirmed the rejection of the claim on the ground that assessee has only imported ascorbic acid, FCC grade IV and exported the same in a different nomenclature i.e. “ascorbic acid IP grade” in their own packing material. The ld. CIT(A) rejected the argument of the assessee that ascorbic acid IP grade is obtained after applying certain manufacturing process on ascorbic acid FCC grade-IV. According to him both are Vitamin-C and nothing else.

5. Before us, ld. AR for the assessee submitted that firstly the Tribunal held for the same Asst. Year in Revenue’s appeal that assessee’s EOU Unit is entitled for exemption under section 10B. Entire raw material purchased in this EOU unit, situated at Ankleshwar, undergoes manufacturing process. It is only thereafter that manufactured products are exported. According to him ascorbic acid FCC Grade IV is imported from China. It undergoes detailed processing. He explained that following processing is done on FCC Grade IV on ascorbic acid to make it into ascorbic acid IP grade. The concerned part of the reply of the assessee given to ld. CIT(A) on this aspect is reproduced below :-

“g. Following processes are done for converting FCC-IV grade of Ascorbic Acid into

IP grade of Ascorbic Acid:

(i) The FCC-IV grade purchased from the market is mixed with water (DM water) in a big vessel. Further in the said vessel chemicals like sodium carbonate and methanol are also added.

(ii) This process ii done fur removing impurities in the FCC- IV grade. Contents like Oxalic Acid which reduces the effectiveness of the medicine are removed.

(iii) This process is done to obtain pure form of Ascorbic Acid The Ascorbic Acid is in slurry form in this process.

(iv) Frther processing {after mixing with DM Water) is done by mixing other chemicals for removing the iron and lead contents from the Ascorbic Acid.

(v) After [he said process being performed, the material is transferred to the SS Reactor and centrifuged.

(vi) The slurry is converted into cake form in this process.

(vii) The cake form obtained, is then mixed with sulphuric acid and methanol.

(viii) This form is again taken to the SS Reactor and centrifuged at a prescribed temperature and pressure

(ix) After this process the cake is transferred for cooling and chilling to the cooling and chilling plant.

(x) The chilled cake is then transferred to dryer.

(xi) In this stage again various processes are performed for removing the moisture content,

(xii) Once the moisture contents are removed, an altogether different quality of Ascorbic Acid is obtained in powder form,

(xiii) After this process packing is done and the item is now ready to be used for medical purpose.

(xiv) On the basis of the above your kind office would appreciate that the appellant performs various processes which amounts to manufacture.

(xv) Your kind office would appreciate that the material fed into the plant and the material obtained are altogether different. Detailed process flow chart is available at page no. 69 of the paper book. (xvi) It is also worthwhile to mention that the Ascorbic Acid FCC-IV grade has a life of 2 years, whereas the ascorbic acid-IP grade manufactured by the appellant has a life of 4 years as prescribed by FDA. Your kind office would appreciate that the life of the product has nearly doubled.

(xvii) This is not possible if the same (Ascorbic Acid FCC Grade IV) is sold as such. Various processes are required to be performed for enhancing the life and quality of the product.

(xviii) We therefore submit that the very basis of considering the sale of Ascorbic Acid as trading activity is not correct.

6. The ld. AR submitted that the concerned manufacturing unit is recognized by Foods and Drugs Administration. A letter to this effect is also issued by the Office of the Development Commissioner, Kandla SEZ which is placed at page 26 of the paper book- Letter from Food and Drug Control Department, Gandhinagar, showing that assessee is manufacturing, Ascorbic acid (Vitamin-C) IP is placed at page 27 of the paper book. It is paying excise duty on the manufacturing of Ascorbic Acid I.P. grade. Auditors have certified that assessee is entitled to exemption under section 10B on the items manufactured by it and exported. Under these circumstances there is no reason to hold that assessee is not entitled to exemption 10B on this part of manufacturing/processing.

7. Against this, ld. DR submitted that firstly auditors have clearly commented in Schedule-`O’ of raw material consumed that Rs.1,96,19,168/- represented finished goods purchased. Therefore, sales to this extent could not be granted exemption under section 10B. The ld. DR then submitted, presuming for the sake of argument that assessee is undertaking some processing on ascorbic acid, food grade-4 but the output is still ascorbic acid. Therefore, there is no manufacturing and exemption under section 10B could not be granted. Thirdly it is not shown that ascorbic acid food grade -4 (imported as finished goods) could not be utilized in the same way, or in the same manner where ascorbic acid IP is utilized. If utilization of items before processing and after processing are not different except changing the grade then it will not fall within the definition of manufacturing or production and, therefore, assessee will not be entitled for exemption under section 10B.

8. We have considered the rival submissions and perused the material on record. The undisputed fact now is that assessee has imported ascorbic acid FCC grade-iv and after undergoing some processing has made ascorbic acid IP. In the processing the assessee is using certain other chemicals, such as methanol and sulphuric acid for the purpose of cleaning and removing iron and lead contents, if any. The fine grade of ascorbic acid IP is exported. The question now arises is whether refined ascorbic acid would amount to manufacture or production within the meaning of section 10B or the I.T. Act. For the sake of convenience we refer to section 10B of the IT Act as under :-

“10B. Special provisions in respect of newly established hundred per cent export-oriented undertakings.—(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent. export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years :

Provided further that the profits and gains derived from such domestic sales of articles or things or computer software as do not exceed twenty-five per cent. of total sales shall be deemed to be the profits and gains derived from the export of articles or things or computer software. Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.

(2) This section applies to any undertaking which fulfills all the following conditions, namely :—

(i) it manufactures or produces any articles or things or computer software;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :”

9. Thus provisions of section 10B would be applied to an industry which is manufacturing or producing any article or thing. There are other conditions required to be fulfilled for getting exemption under section 10B such as assessee should be 100% export oriented undertaking and there should be approval of the undertaking by a competent authority. The foremost condition is that such 100% export oriented unit should manufacture or produce any article or thing or computer software that fulfills all other conditions as stipulated in sub-section (2). The essence of manufacturing is the change from one object to another for the purpose of making it a different marketable commodity. Every change in the raw material could not be called as manufacturing unless a new product which has a separate commercial identity in the market comes into existence. The transformation to the raw material should of such a nature that a new and different article or thing emerges which is distinct in name, character and use. If original thing remains the same after undergoing the processing even though it may be called by a different name then it cannot be said to be manufacturing of an article or thing. The essence of determining whether new article or thing is manufactured or produced lies in the identity and use of the commodity before undergoing the processing and after the processing. If the identity and character remain the same then there is no manufacturing or production but where identity and character get transformed then it would be a manufacturing or production of new article or thing. Our view is supported by the decision of ITAT Jodhpur Bench in the case of Kwal Pro Exports vs. ACIT (2008) 297 ITR (A.T.) 0049, wherein it has been observed as under :-

“The essence of “manufacture” is the change from one object to another for the purposes of making it marketable with the aid and employment of men, machinery and material. Every change in the raw material cannot be characterised as manufacture unless a new product, which has a separate commercial identity in the market, comes into being. There must be such a transformation that a new and different article must emerge having distinct name, character and use. If the original commodity continues to remain the same after undergoing processes and is called by the same name, it cannot be said there is manufacture of an article or thing. Thus the main test is to decide whether the identity of the commodity, before and after undergoing various processes changes or remains the same in the commercial world.

The word “produce” is wider than “manufacture” and includes within its ambit not only activity of manufacturing the material by applying human endeavor on some existing raw material but also securing certain produce from natural element, for example, by growing plants on soil, or by operating mines and the like or for example by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk. The word “production” includes within its purview the word “manufacture” and also activities. The term “processing” has to be distinguished from “manufacturing” in the sense that a mere processing does not ordinarily make the thing to undergo a change losing its original identity, whereas in “manufacturing” the original article loses its identity and a thing differently known or recognized in common parlance comes into existence.

The word “manufacture” has not been defined in the Act and it has different shades of its meaning. It is to be interpreted in the context of the object and language used in the relevant section. When we view the term “manufacture” in the setting of section 10B it becomes crystal clear that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. The term “manufacture or produce” in section 10B can be considered only when a commercially new and distinct product comes into existence after undergoing manufacturing activities. If the intention had been to include “processing” as understood generally as a condition precedent for granting exemption under section 10B, the words “manufacturing or processing” would have been used instead of “manufacture or produce”. Further, Explanation 4 leaves nothing to doubt that barring the exception of process of polishing of precious and semi-precious stones all other processing of goods or articles, which do not result into transformation of new product have been kept away from benefit of exemption under this section. By no stretch of imagination, can it be inferred that all processing, not amounting to manufacture of an article, can be made eligible for exemption under section 10B.”

10. Hon. Supreme Court in CIT vs. Oracle Software (I) Ltd. (2010) 320 ITR 546 (SC) observed that if an operation/ process rendered a commodity fit for use for which it would not be otherwise be fit, the operation/ process would fall within the meaning of word “manufacture”. A blank CD on which certain material was recorded through electronic process, the process would be called as manufacturing as blank CD could not be used for the purpose as recorded CD would be used. Where different kinds of teas were mixed to different grade of tea it would not amount to manufacturing as held by Hon. Supreme Court in CIT vs. Tara Agencies (2007) 292 ITR 444(SC). The term manufacture within the meaning of section 10B would also refer to bringing into existence of new article or thing distinct in identity and character. The word used in section 10B manufacturing or production and not manufacturing or processing. Thus the word `manufacture’ is coming in association with production meaning thereby that merely by carrying out processing which result into same commodity, there will not be any manufacturing or production.

11. Hon. Madras High Court in CIT vs. Premier Tobacco Packers (P) Ltd. (2006) 284 ITR 222 (Mad) also emphasized on emerging of new and different article through manufacturing activity.

12. In the context of present case we find that what was put into the processing as raw material was ascorbic acid food grade IV. It was refined by removing some contents of iron or lead, if any, and ascorbic acid IP was resulted. It is undisputed fact that it was ascorbic acid which was imported and put for processing and what was resulted was also ascorbic acid but of finer quality. In spite of repeated asking from the Bench ld. AR was unable to show whether ascorbic acid FCC grade IV could or could not be used in place where ascorbic acid IP is used or where use of ascorbic acid FCC grade IV is prohibited by law or Regulation in cases where ascorbic acid IP is used. In absence of any material to the effect that the use of ascorbic acid FCC grade IV and ascorbic acid IP are different and ascorbic acid FCC grade IV could not be used in place where ascorbic acid IP is used, we are unable to uphold the contention of the ld. AR that it is undertaking the manufacturing or production in respect of items imported by it worth Rs.1,96,19,168/- described as purchase of finished goods by auditor and after alleged claim of processing it has resulted into ascorbic acid IP. We, therefore, hold no manufacturing or production of any new article or thing has taken place from import of finished goods of ascorbic acid FCC grade IV. This ground is accordingly decided against the assessee.

13. Ground No.2 of assessee relates to dis allowance under section 40A(3) amounting to Rs.50,027/-. AO has already disallowed a sum of Rs.20,210/- out of total cash payment of Rs.1,01,052/- in respect of following items:-

i) ESIC Rs.20,667/-

ii) Telephone exp. Rs.20,197/-

iii) Business promotion Rs.25,917/-

iv) Telephone exp. Rs.34,271/-


Tota Rs.1,01,052/-

The assessee agreed before ld. CIT (A) that dis allowance under section 40A(3) in respect of business promotion expenditure is reasonable. The ld. CIT(A), however, confirmed other dis allowance made by the AO also.

14. The assessee has come up in appeal before us, in respect of rest of the items other than on business promotion expenditure.

15. The ld. AR submitted that payment to ESIC is a payment to the Government and payment for telephone is not an expenditure for purchase of any item. Therefore, no dis allowance should have been made under section 40A(3).

16. The ld. DR on the other hand, supported the order of ld. CIT(A).

17. After considering the rival submissions, we delete the addition in respect of payment made to ESIC being the payment made to the Government Department and it is covered under the exception to Section 40A(3).

18. In respect of expenditure on telephone, we do not find any satisfactory explanation. Therefore, dis allowance in respect of this payment is confirmed. This ground of assessee is partly allowed.

19. The next issue is payment made under section 43B in respect of ESIC and PF. The issue is now covered by the decision of Hon. Supreme Court in CIT vs. Alam Extrusion 319 ITR 306 (SC) according to which contributions to PF made before due date of filing the return are allowable as deduction. It is held that deletion of second proviso to section 43B and the amendment to first proviso by the Finance Act 2003 was to overcome implementation problem and, therefore, amendments though made applicable by Parliament only w.e.f. 1.4.1988 were curative in nature and would apply retrospectively w.e.f. 1.4.1988. In view of this AO will allow all the payments made before filing the return of income. This ground of assessee is accordingly allowed.

20. Ground No.4 relates to confirmation of disallowance of Rs.2,78,917/- under section 35D. This issue has been restored in the earlier years by the Tribunal to the file of AO with the direction to consider the claim of assessee after obtaining the exact details of the expenditure. The Tribunal in the case of assessee in ITA No.3883,3884 & 3885/Ahd/2004 for AYs.1998-99, 2000-01 & 2001-02 has observed as under :-

“3. The next common ground in all the three years is with regard to the dis allowance u/s 35D of the Act. The assessee claimed a sum of Rs.4,40,917/- in the original return allowed from Asst. Year 1996-97 on wards. The AO disallowed the expenditure by observing that assessee has not given the details of the expenditure. According to him, there was an increase in the capital of Rs.3,45,30,458/- on comparison with AYs 1995-96 and 1993-94 and he worked out 2.5% thereof at Rs.8,63,261 which according to him is much less than the total public issue expenses of Rs.44,09,170/-. He, therefore, disallowed the entire claim of the assessee. The CIT(A) upheld the dis allowance by stating that the assessee would be entitled to deduction of Rs.1,62,000/- per year starting from Asst. Year 2000-01 for 10 successive years as according to him the assessee had set up a new industrial undertaking only w.e.f.1.10.1999.

4. The ld. Counsel of the assessee explained that the claim of Rs.4,40,917/- was for the increase in public issue for extension of old project and it was being claimed from Asst. Year 1996-97. It has nothing to do with the setting up of industrial undertaking on 1.10.1999. In any case, there was an increase in the capital of Rs.518.42 lacs as per the revision claim of the assessee vide letter dated 26.10.2004 and borrowings from bank of Rs.132.62 lacs aggregating to Rs.651.04 lacs 2.5% thereof works out to Rs.16.27 lacs and 1/5th thereof should have been allowed even as per the CIT (A)’s working as against Rs.16.27 lacs which is 1/10th of capital amount. There is thus some misunderstanding on the facts and circumstances of the case. We, therefore, set aside the orders of the CIT (A) as well as that of the AO and remit the matter back to the file of the AO to consider the claim of the assessee after obtaining the exact details of expenditure vis-à-vis 35D claim of the assessee whether from Asst. Year 1996-97 or 2000-01 or both and consider the claim of the assessee in the right perspective.”

Respectfully following the above order of the Tribunal, we restore this issue this year also to the file of AO to decide in accordance with the decision taken in the preceding year. Accordingly this ground is allowed for statistical purposes.

21. As a result, assessee’s appeal is partly allowed and partly allowed for statistical purposes.

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