Brief Facts of the case
1. There are two appeal that need to be answered (i) For AY 2007-08 assessee had had claimed deduction/exemption under Section 10B of the Income Tax Act, 1961 (Act, for short) on profit of Rs.69,69,429/- from the Noida Unit. The Assessing Officer did not allow deduction under Section 10B on the ground that the assessee had not manufactured any goods in the Noida Unit. He referred to reply received from R.N. Metals, Jaipur, M/s Sustul Engg. Corp. Mumbai, M/s Chanderpur Works Yamuna Nagar (Haryana) to the effect that they had manufactured and exported various goods on behalf of respondent assessee. (ii) For the assessment year 2008-09, The assessee had claimed exemption/deduction under Section 10B of Rs Rs.12,17,41,816/-.
2. The assessee had claimed for AY 2008-09 that they had earned exempt income as they had carried out upgradation of cement plant in Zambia and also received consideration for design, fabrication and commissioning of a steel rolling mill in Kazakhastan. The assessee had filed a flow chart to explain the nature of work undertaken to support their claim under Section 10B of the Act.
3. The Assessing Officer for AY 2008-09, also held that the assessee was not carrying on manufacturing and assembling activities as they had erected the steel rolling mill and the cement plant abroad. The assessee himself did not manufacture any goods but had removed various parts after testing and disassemble them for the purpose of export. Testing, painting or pre-packaging for export cannot be construed as manufacture or assembling activity. The assessee himself did not possess adequate plant, machinery or infrastructure to carry out manufacturing activities.
4. CIT(A) allow assessee appeal on the ground of consistency, ITAT also affirmed in favour of the assessee. Therefore, aggrieved by the decision of the ITAT, revenue has preferred an appeal before High Court.
Issue under Consideration
Whether the assessee is entitled to benefit under Section 10B of the Income Tax Act, 1961 as he was engaged in manufacture or production of an article or thing if activities of erection the steel rolling mill and the cement plant done abroad and Testing, painting or pre-packaging for export cannot be construed as manufacture or assembling activity.
Observations/decision of High Court :
1. Sub-section (1) to Section 10B states that a deduction of such profits and gains as derived from 100% export oriented undertaking from export of articles, things or computer software would be allowed for 10 consecutive assessment years beginning from the year in which the undertaking begins to manufacture or produce articles, things or computer software.
2. Section 10B of the Act is beneficial provision and has been enacted to give tax concession or exemption to 100% export oriented units engaged in manufacture or production of articles, things or computer software. It is an undisputed and a factual position recorded by the Tribunal that the respondent assessee had an export oriented unit in Noida Export Processing Zone, which was duly approved.
3. After review of flow chart would disclose that the respondent assessee had carried out detailed engineering analysis of system design, equipment specifications and development and preparation of engineering drawings. Thereafter approval was taken from the client. At the next stage, the assesseed issued technical specification and drawings for production, which activity was outsourced to vendors. During the course of production by the third parties vendors, process inspection and final inspection was undertaken. After approval, the goods were dispatched from the vendors‘ factory to the assesseed. The goods were then examined at the Noida Unit and approved.
4. The respondent-assessee had also undertaken in-house fabrication in addition to inspection at the vendors factory to whom the production or manufacture had been outsourced. Once the goods were received at the Noida unit, they were examined and assembled and tested. Rust protection was undertaken. Big assemblies were disassembled and repacked. Small assemblies were packed as such. Thereupon, the goods were exported from India and erected at the site, tested and then commissioned.
5. Question which arises for consideration is whether the assessee can be considered to be engaged in manufacture and production of articles or things. It is apparent that the respondent assessee did not self-manufacture or produce most of the articles or things which were exported and used for setting up the plant. The assessee had undertaken detailed engineering drawings and as per the specification and drawings, the actual manufacture and production work was outsourced. Throughout the said process, inspection was carried out and only after approval, the goods were dispatched. The goods were re-inspected, checked, assembled and disassembled, before they were exported out of India. Only upon satisfactory performance and ensuring that there was perfect matching, the goods were exported. We are in agreement with the findings recorded by the Tribunal that the aforesaid activities qualify and should be treated as manufacture or production of goods by the assessee himself.
6. The judgment of the Supreme Court in Commissioner of Income Tax versus Oracle Software India Limited, (2010) 320 ITR 546, in which the controversy was whether the assessee was a manufacturer and thus entitled to deduction under Section 80 IA. The Supreme Court interpreted the term ―manufacture‖ and held that the process of commercial duplication of software requires four steps. Installation/transfer of virtual image of the software on the recordable media with checking of integrity would qualify as manufacture. It was held that manufacture implies change, but every change is not manufacture despite the fact that every change in an article is a result of treatment of labour and manipulation. If the operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of word manufacture.
7. In CIT versus N.C. Budharaja & Co. (1993) 204 ITR 412, which has been noticed in Lovlesh Jain case (supra), the Supreme Court at page 424 referred to the principle that one must keep in mind the context, since a word takes its colour from the context. In C. Budharaja’s case (supra) it was observed that the word ―production‖ has wider connotation than the word manufacture and illustratively every manufacture could be categorised as production, but not vice-a-versa. In the present context, in Section 10B, the word production has been used in addition to the word manufacture and also an expanded scope and ambit is envisaged for the said term in the context of Section 10B in Explanation 4.
8. It would be incongruous and inappropriate in the context of Section 10B of the Act to hold that the respondent-assessee, an 100% export oriented unit, who had refurbished a mini cement plant in Zambia and established a mini steel mill in Kazakhstan, were not engaged in manufacture or production of articles or things. The fallacy in the argument raised by the Revenue is apparent. It is accepted that in case the mini steel plant and refurbished cement mill had been completely assembled in the unit in Noida and exported as such, the assessee would qualify and would be a manufacturer or a person engaged in production of articles or things. Benefit under Section 10B, it is asserted by the Revenue, should be denied for what was exported were separated or disassembled parts of the mini cement and steel plant/mill, as it was not possible to export after fabrication and assembly the entire plant/mill itself. The said fabrication and assembly had to be undertaken in view of size and logistics at the location where the plant/mill had to be upgraded or set up. The aforesaid reasoning and ratiocination is obdurate and deflates the object and purpose of Section 10B of the Act.
9. In view of the aforesaid discussion, the substantial question of law framed above is answered in favour of the respondent-assessee and against the appellant-Revenue
Analysed by CA Rahul Sureka