Tonira Pharma Ltd.,, v. The ACIT.,Bharuch Circle, Bharuch

ITA 235/AHD/2007 | 2002-2003
Pronouncement Date: 30-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 23520514 RSA 2007
Bench Ahmedabad
Appeal Number ITA 235/AHD/2007
Duration Of Justice 3 year(s) 3 month(s) 17 day(s)
Appellant Tonira Pharma Ltd.,,
Respondent The ACIT.,Bharuch Circle, Bharuch
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 30-04-2010
Date Of Final Hearing 21-04-2010
Next Hearing Date 21-04-2010
Assessment Year 2002-2003
Appeal Filed On 12-01-2007
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI MUKUL SHRAWAT JM AND D.C.AGRAWAL AM TONIRA PHARMA LTD. PLOT NO.4722 GIDC ESTATE OPP. NEW TELEPHONE EXCHANGE ANKLESHWAR DIST BHARUCH. V/S . ASSTT. CIT BHARUCK CIRCLE BHARUCH. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S. V. AGRAWAL AR RESPONDENT BY:- SHRI RAJEEV SAHAI CIT DR O R D E R PER D.C.AGRAWAL ACCOUNTANT MEMBER. THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS :- (1) THE LD. COMMISSIONER INCOME TAX (APPEALS)XIX AHMED ABAD (CALLED CIT(A) HAS ERRED IN DENYING EXEMPTION U/S 1 0B IN RESPECT OF PROFIT EARNED FROM MFG. OF ASCROBIC ACID IP OUT OF ASCROBIC ACID FCCIV BY TREATING SAME AS TRADING ACT IVITY. (1.1) THE LD. CIT(A) FURTHER ERRED IN CONFIRMING E STIMATION OF NP RS.49 04 792/- I.E.@ 20% ON PURCHASE OF GOODS AN D TREATING SAME AS TRADING PROFIT AND DENIED EXEMPTION U/S 10B . (2) THE LD. CIT(A) HAS ERRED IN CONFIRMING DISALLOWANCE OF RS.15 027/- (20% OF RS.75 135/-) U/S 40A(3) IN RESP ECT OF PAYMENTS OF EXPS. OTHER THAN BUSINESS PROMOTION EXP S. ITA NO.235/AHD/2007 ASST. YEAR :2002-03 2 (3) THE LD. CIT(A) HAS ERRED IN CONFIRMING ADDITION MAD E U/S 43B IN RESPECT OF ESIC & PF PAID BY ASSESSEE. (4) THE LD. CIT(A) HAS ERRED IN CONFIRMIN G DISALLOWANCE 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 EXEMPTI ON 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 PROCEED INGS THE AO HAD NOTICED THAT ASSESSEE HAD SHOWN PURCHASES OF FINISH ED GOODS OF RS.1 96 19 168/-. THESE PURCHASES ARE RELATED TO AS CORBIC ACID (VITAMIN C). THESE GOODS WERE AS CLAIMED BY THE ASSESSEE P ROCESSED AND SOLD AS ASCORBIC ACID (VITAMIN C) AND EXEMPTION UNDER SECTI ON 10B WAS CLAIMED ON THIS AMOUNT ALSO. THE AO FOUND THAT THE CHARTERE D ACCOUNTANT HAS NOT CERTIFIED IN ANY MANNER THAT THE GOODS WERE PROCESS ED. THERE ARE ALSO NO EVIDENCES OR DETAILS THAT ANY PROCESSING HAS BEEN D ONE. 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 ADDITIO N OF RS.49 04 782/- BEING 20% OF THE PURCHASES OF RS.96 19 168/-. IN TH IS REGARD THE AO HAS HELD THAT EXEMPTION UNDER SECTION 10B IS NOT AVAILA BLE ON TRADING ACTIVITIES. 3 4. THE LD. CIT(A) CONFIRMED THE REJECTION OF THE CL AIM 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 A RGUMENT OF THE ASSESSEE THAT ASCORBIC ACID IP GRADE IS OBTAINED AF TER 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 THA T FIRSTLY THE TRIBUNAL HELD FOR THE SAME ASST. YEAR IN REVENUES APPEAL THAT ASSESSEES EOU UNIT IS ENTITLED FOR EXEMPTION UNDER SECTION 10 B. ENTIRE RAW MATERIAL PURCHASED IN THIS EOU UNIT SITUATED AT AN KLESHWAR UNDERGOES MANUFACTURING PROCESS. IT IS ONLY THEREAFTER THAT M ANUFACTURED PRODUCTS ARE EXPORTED. ACCORDING TO HIM ASCORBIC ACID FCC GR ADE IV IS IMPORTED FROM CHINA. IT UNDERGOES DETAILED PROCESSING. HE EX PLAINED THAT FOLLOWING PROCESSING IS DONE ON FCC GRADE IV ON ASC ORBIC 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 REPR ODUCED 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 IMPURITIE S 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 WIT H DM WATER) IS DONE BY MIXING OTHER CHEMICALS FOR REMOVING THE IRON AND LEAD CONTENTS F ROM THE ASCORBIC ACID. 4 (V) AFTER [HE SAID PROCESS BEING PERFORMED TH E MATERIAL IS TRANSFERRED TO THE SS REACTOR AND CENTRIFUGED. (VI) THE SLURRY IS CONVERTED INTO CAKE F ORM IN THIS PROCESS. (VII) THE CAKE FORM OBTAINED IS THEN MIXED WITH SULPHURI C ACID AND METHANOL. (VIII) THIS FORM IS AGAIN TAKEN TO THE SS REACTOR AND CENT RIFUGED AT A PRESCRIBED TEMPERATURE AND PRESSURE (IX) AFTER THIS PROCESS THE CAKE IS TRANS FERRED FOR COOLING AND CHILLING TO THE COOLING AND CHILL ING 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 ALTOGETH ER 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 O FFICE WOULD APPRECIATE THAT THE APPELLANT PERFORMS VARIOUS PROCESSES WHICH AMOUNTS TO MANUFACTURE. (XV) YOUR KIND OFFICE WOULD APPRECIATE THAT TH E MATERIAL FED INTO THE PLANT AND THE MATERIAL OBTAINED ARE ALTOGETHER DIFFERENT. DET AILED 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 PRESCRIBE D BY FDA. YOUR KIND OFFICE WOULD APPRECIATE THAT THE LIFE OF THE PRODUC T 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 PERFO RMED FOR ENHANCING THE LIFE AND QUALITY OF THE PRODUCT. (XVIII) WE THEREFORE SUBMIT THAT THE VERY BASIS OF CONSIDER ING THE SALE OF ASCORBIC ACID AS TRADING ACTIVITY IS NOT CORRECT. 6. THE LD. AR SUBMITTED THAT THE CONCERNED MANUFACT URING UNIT IS RECOGNIZED BY FOODS AND DRUGS ADMINISTRATION. A LET TER TO THIS EFFECT IS ALSO ISSUED BY THE OFFICE OF THE DEVELOPMENT COMMIS SIONER KANDLA SEZ 5 WHICH IS PLACED AT PAGE 26 OF THE PAPER BOOK- LETTE R FROM FOOD AND DRUG CONTROL DEPARTMENT GANDHINAGAR SHOWING THAT ASSES SEE IS MANUFACTURING ASCORBIC ACID (VITAMIN-C) IP IS PLAC ED AT PAGE 27 OF THE PAPER BOOK. IT IS PAYING EXCISE DUTY ON THE MANUFAC TURING OF ASCORBIC ACID I.P. GRADE. AUDITORS HAVE CERTIFIED THAT ASSES SEE IS ENTITLED TO EXEMPTION UNDER SECTION 10B ON THE ITEMS MANUFACTUR ED BY IT AND EXPORTED. UNDER THESE CIRCUMSTANCES THERE IS NO REA SON TO HOLD THAT ASSESSEE IS NOT ENTITLED TO EXEMPTION 10B ON THIS P ART OF MANUFACTURING/PROCESSING. 7. AGAINST THIS LD. DR SUBMITTED THAT FIRSTLY AUDI TORS HAVE CLEARLY COMMENTED IN SCHEDULE-O OF RAW MATERIAL CONSUMED THAT RS.1 96 19 168/- REPRESENTED FINISHED GOODS PURCHAS ED. THEREFORE SALES TO THIS EXTENT COULD NOT BE GRANTED EXEMPTION UNDER SECTION 10B. THE LD. DR THEN SUBMITTED PRESUMING FOR THE SAKE OF ARGUME NT 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. T HIRDLY 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 SA ME MANNER WHERE ASCORBIC ACID IP IS UTILIZED. IF UTILIZATION OF ITE MS 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 EXEMPT ION UNDER SECTION 10B. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. THE UNDISPUTED FACT NOW IS THAT ASSESSEE HAS IMPORTED ASCORBIC ACID FCC GRADE-IV AND AFTER UNDERGOING SOME PROCESS ING HAS MADE ASCORBIC ACID IP. IN THE PROCESSING THE ASSESSEE IS USING CERTAIN OTHER 6 CHEMICALS SUCH AS METHANOL AND SULPHURIC ACID FOR THE PURPOSE OF CLEANING AND REMOVING IRON AND LEAD CONTENTS IF AN Y. THE FINE GRADE OF ASCORBIC ACID IP IS EXPORTED. THE QUESTION NOW ARIS ES IS WHETHER REFINED ASCORBIC ACID WOULD AMOUNT TO MANUFACTURE OR PRODUC TION WITHIN THE MEANING OF SECTION 10B OR THE I.T. ACT. FOR THE SAK E OF CONVENIENCE WE REFER TO SECTION 10B OF THE IT ACT AS UNDER :- 10B. SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABL ISHED HUNDRED PER CENT. EXPORT-ORIENTED UNDERTAKINGS.(1) SUBJECT TO THE PR OVISIONS 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 ARTI CLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PERVIOUS YEAR IN WH ICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLES OR THINGS OR COMPUTER SOFTWARE AS THE CASE MAY BE SHALL BE ALLOWED FROM THE TOTAL IN COME OF THE ASSESSEE : PROVIDED THAT WHERE IN COMPUTING THE TOTAL INCOME O F 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 IMMEDIAT ELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT 2000 THE UNDERTAKING SHALL BE ENT ITLED TO THE DEDUCTION REFERRED TO IN THIS SUB-SECTION ONLY FOR THE UNEXPI RED 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 E XCEED TWENTY-FIVE PER CENT. OF TOTAL SALES SHALL BE DEEMED TO BE THE PROFITS AN D 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 TH E 1ST DAY OF APRIL 2010 AND SUBSEQUENT YEARS. (2) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH F ULFILS 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 R ECONSTRUCTION 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 7 CONDITIONS REQUIRED TO BE FULFILLED FOR GETTING EXE MPTION UNDER SECTION 10B SUCH AS ASSESSEE SHOULD BE 100% EXPORT ORIENTED UNDERTAKING AND THERE SHOULD BE APPROVAL OF THE UNDERTAKING BY A CO MPETENT AUTHORITY. THE FOREMOST CONDITION IS THAT SUCH 100% EXPORT ORI ENTED UNIT SHOULD MANUFACTURE OR PRODUCE ANY ARTICLE OR THING OR COMP UTER SOFTWARE THAT FULFILLS ALL OTHER CONDITIONS AS STIPULATED IN SUB- SECTION (2). THE ESSENCE OF MANUFACTURING IS THE CHANGE FROM ONE OBJECT TO ANOT HER FOR THE PURPOSE OF MAKING IT A DIFFERENT MARKETABLE COMMODITY. EVERY C HANGE IN THE RAW MATERIAL COULD NOT BE CALLED AS MANUFACTURING UNLES S A NEW PRODUCT WHICH HAS A SEPARATE COMMERCIAL IDENTITY IN THE MARKET CO MES INTO EXISTENCE. THE TRANSFORMATION TO THE RAW MATERIAL SHOULD OF SU CH A NATURE THAT A NEW AND DIFFERENT ARTICLE OR THING EMERGES WHICH IS DIS TINCT IN NAME CHARACTER AND USE. IF ORIGINAL THING REMAINS THE SAME AFTER U NDERGOING THE PROCESSING EVEN THOUGH IT MAY BE CALLED BY A DIFFER ENT NAME THEN IT CANNOT BE SAID TO BE MANUFACTURING OF AN ARTICLE OR THING. THE ESSENCE OF DETERMINING WHETHER NEW ARTICLE OR THING IS MANUFAC TURED OR PRODUCED LIES IN THE IDENTITY AND USE OF THE COMMODITY BEFOR E UNDERGOING THE PROCESSING AND AFTER THE PROCESSING. IF THE IDENTIT Y AND CHARACTER REMAIN THE SAME THEN THERE IS NO MANUFACTURING OR PRODUCTI ON BUT WHERE IDENTITY AND CHARACTER GET TRANSFORMED THEN IT WOULD BE A MA NUFACTURING OR PRODUCTION OF NEW ARTICLE OR THING. OUR VIEW IS SUP PORTED BY THE DECISION OF ITAT JODHPUR BENCH IN THE CASE OF KWAL PRO EXPOR TS VS. ACIT (2008) 297 ITR (A.T.) 0049 WHEREIN IT HAS BEEN OBSERVED A S UNDER :- THE ESSENCE OF MANUFACTURE IS THE CHANGE FROM ON E OBJECT TO ANOTHER FOR THE PURPOSES OF MAKING IT MARKETABLE WITH THE AID AND EMPLOYMENT OF MEN MACH INERY AND MATERIAL. EVERY CHANGE IN THE RAW MATERIAL CANNOT BE CHARACTERISED AS MANUFACTURE UNL ESS 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 N AME CHARACTER AND USE. IF THE ORIGINAL COMMODITY CONTINUES TO REMAIN THE SAME AFTER UNDERGOING PROCE SSES AND IS CALLED BY THE SAME NAME IT CANNOT BE SAID THERE IS MANUFACTURE OF AN ARTICLE OR THING. T HUS THE MAIN TEST IS TO DECIDE WHETHER THE IDENTITY OF THE COMMODITY BEFORE AND AFTER UNDERGOING VARIOUS PROC ESSES 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 ENDEAV OUR ON SOME EXISTING RAW MATERIAL BUT ALSO 8 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 C OW THE MILKMAN PRODUCES MILK THOUGH HE HAS NOT APPLIED ANY PROCESS ON ANY RAW MATERIAL FOR THE PUR POSE OF BRINGING INTO EXISTENCE THE THING KNOWN AS MILK. THE WORD PRODUCTION INCLUDES WITHIN ITS PUR VIEW 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 CHA NGE LOSING ITS ORIGINAL IDENTITY WHEREAS IN MANUFACTURING THE ORIGINAL ARTICLE LOSES ITS IDEN TITY AND A THING DIFFERENTLY KNOWN OR RECOGNISED 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 10 B IT BECOMES CRYSTAL CLEAR THAT IT IS USED TO MEAN PRODUCTION OF A NEW ARTICLE OR BRINGING INTO EXISTE NCE SOME NEW COMMODITY BY AN INDUSTRIAL UNDERTAKING . THE TERM MANUFACTURE OR PRODUCE IN SECTION 10B CA N BE CONSIDERED ONLY WHEN A COMMERCIALLY NEW AND DISTINCT PRODUCT COMES INTO EXISTENCE AFTER UND ERGOING MANUFACTURING ACTIVITIES. IF THE INTENTION HAD BEEN TO INCLUDE PROCESSING AS UNDERSTOOD GENERALL Y AS A CONDITION PRECEDENT FOR GRANTING EXEMPTION UNDER SECTION 10B THE WORDS MANUFACTURING OR PROC ESSING WOULD HAVE BEEN USED INSTEAD OF MANUFACTURE OR PRODUCE. FURTHER EXPLANATION 4 LE AVES 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 PROD UCT HAVE BEEN KEPT AWAY FROM BENEFIT OF EXEMPTION UNDER THIS SECTION. BY NO STRETCH OF IMAGINATION C AN IT BE INFERRED THAT ALL PROCESSING NOT AMOUNTIN G 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/PROC ESS RENDERED A COMMODITY FIT FOR USE FOR WHICH IT WOULD NOT BE OTH ERWISE BE FIT THE OPERATION/PROCESS WOULD FALL WITHIN THE MEANING OF WORD MANUFACTURE. A BLANK CD ON WHICH CERTAIN MATERIAL WAS RECORDED T HROUGH ELECTRONIC PROCESS THE PROCESS WOULD BE CALLED AS MANUFACTURI NG 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 GRA DE OF TEA IT WOULD NOT AMOUNT TO MANUFACTURING AS HELD BY HON. SUPREME COU RT IN CIT VS. TARA AGENCIES (2007) 292 ITR 444(SC). THE TERM MANUFACTU RE WITHIN THE MEANING OF SECTION 10B WOULD ALSO REFER TO BRINGING INTO EXISTENCE OF NEW ARTICLE OR THING DISTINCT IN IDENTITY AND CHARA CTER. THE WORD USED IN SECTION 10B MANUFACTURING OR PRODUCTION AND NOT MAN UFACTURING OR PROCESSING. THUS THE WORD MANUFACTURE IS COMING I N ASSOCIATION WITH PRODUCTION MEANING THEREBY THAT MERELY BY CARRYING OUT PROCESSING WHICH RESULT INTO SAME COMMODITY THERE WILL NOT BE ANY M ANUFACTURING OR PRODUCTION. 9 11. HON. MADRAS HIGH COURT IN CIT VS. PREMIER TOBAC CO PACKERS (P) LTD. (2006) 284 ITR 222 (MAD) ALSO EMPHASIZED ON EM ERGING OF NEW AND DIFFERENT ARTICLE THROUGH MANUFACTURING ACTIVITY. 12. IN THE CONTEXT OF PRESENT CASE WE FIND THAT WHA T WAS PUT INTO THE PROCESSING AS RAW MATERIAL WAS ASCORBIC ACID FOOD G RADE 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 RE SULTED WAS ALSO ASCORBIC ACID BUT OF FINER QUALITY. IN SPITE OF REP EATED ASKING FROM THE BENCH LD. AR WAS UNABLE TO SHOW WHETHER ASCORBIC AC ID 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 PROHIBIT ED 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 ACI D FCC GRADE IV AND ASCORBIC ACID IP ARE DIFFERENT AND ASCORBIC ACID FC C 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 T HING 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 DISALLOWANCE UNDER SECTION 40A(3) AMOUNTING TO RS.50 027/-. AO HAS ALREADY DIS ALLOWED A SUM OF RS.20 210/- OUT OF TOTAL CASH PAYMENT OF RS.1 01 05 2/- IN RESPECT OF FOLLOWING ITEMS:- 10 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 DISALLOW ANCE UNDER SECTION 40A(3) IN RESPECT OF BUSINESS PROMOTION EXPENDITURE IS REASONABLE. THE LD. CIT(A) HOWEVER CONFIRMED OTHER DISALLOWANCE M ADE BY THE AO ALSO. 14. THE ASSESSEE HAS COME UP IN APPEAL BEFORE US I N RESPECT OF REST OF THE ITEMS OTHER THAN ON BUSINESS PROMOTION EXPENDIT URE. 15. THE LD. AR SUBMITTED THAT PAYMENT TO ESIC IS A PAYMENT TO THE GOVERNMENT AND PAYMENT FOR TELEPHONE IS NOT AN EXPE NDITURE FOR PURCHASE OF ANY ITEM. THEREFORE NO DISALLOWANCE SH OULD HAVE BEEN MADE UNDER SECTION 40A(3). 16. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORD ER OF LD. CIT(A). 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE DEL ETE THE ADDITION IN RESPECT OF PAYMENT MADE TO ESIC BEING THE PAYMENT M ADE TO THE GOVERNMENT DEPARTMENT AND IT IS COVERED UNDER THE E XCEPTION TO SECTION 40A(3). 18. IN RESPECT OF EXPENDITURE ON TELEPHONE WE DO N OT FIND ANY SATISFACTORY EXPLANATION. THEREFORE DISALLOWANCE I N RESPECT OF THIS PAYMENT IS CONFIRMED. THIS GROUND OF ASSESSEE IS PA RTLY ALLOWED. 11 19. THE NEXT ISSUE IS PAYMENT MADE UNDER SECTION 43 B IN RESPECT OF ESIC AND PF. THE ISSUE IS NOW COVERED BY THE DECISI ON OF HON. SUPREME COURT IN CIT VS. ALAM EXTRUSION 319 ITR 306 (SC) AC CORDING 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 T HE FINANCE ACT 2003 WAS TO OVERCOME IMPLEMENTATION PROBLEM AND THEREFO RE 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 T HE RETURN OF INCOME. THIS GROUND OF ASSESSEE IS ACCORDINGLY ALLOWED. 20. GROUND NO.4 RELATES TO CONFIRMATION OF DISALLOW ANCE OF RS.2 78 917/- UNDER SECTION 35D. THIS ISSUE HAS BEE N RESTORED IN THE EARLIER YEARS BY THE TRIBUNAL TO THE FILE OF AO WIT H THE DIRECTION TO CONSIDER THE CLAIM OF ASSESSEE AFTER OBTAINING THE EXACT DETAILS OF THE EXPENDITURE. THE TRIBUNAL IN THE CASE OF ASSESSEE I N ITA NO.3883 3884 & 3885/AHD/2004 FOR AYS.1998-99 2000-01 & 2001-02 HA S OBSERVED AS UNDER :- 3. THE NEXT COMMON GROUND IN ALL THE THREE YEARS I S WITH REGARD TO THE DISALLOWANCE 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 ONWARDS. THE AO DISALLOWED THE EXPENDITURE BY OBSERVING THAT ASSESSEE HAS NOT GIVEN THE DETAILS OF THE EXPE NDITURE. 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 WORK ED OUT 2.5% THEREOF AT RS.8 63 261 WHICH ACCORDING TO HIM IS MU CH LESS THAN THE TOTAL PUBLIC ISSUE EXPENSES OF RS.44 09 170/-. HE THEREFORE DISALLOWED THE ENTIRE CLAIM OF THE ASSESSEE. THE CI T(A) UPHELD THE DISALLOWANCE BY STATING THAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF RS.1 62 000/- PER YEAR STARTING FROM A SST. YEAR 2000-01 FOR 10 SUCCESSIVE YEARS AS ACCORDING TO HIM THE ASS ESSEE HAD SET UP A NEW INDUSTRIAL UNDERTAKING ONLY W.E.F.1.10.1999. 12 4. THE LD. COUNSEL OF THE ASSESSEE EXPLAINED THAT T HE 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 19 96-97. IT HAS NOTHING TO DO WITH THE SETTING UP OF INDUSTRIAL UND ERTAKING ON 1.10.1999. IN ANY CASE THERE WAS AN INCREASE IN TH E CAPITAL OF RS.518.42 LACS AS PER THE REVISION CLAIM OF THE ASS ESSEE 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 OU T TO RS.16.27 LACS AND 1/5 TH THEREOF SHOULD HAVE BEEN ALLOWED EVEN AS PER THE CIT(A)S WORKING AS AGAINST RS.16.27 LACS WHICH IS 1/10 TH 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 MATT ER BACK TO THE FILE OF THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE AFT ER OBTAINING THE EXACT DETAILS OF EXPENDITURE VIS--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 TRIBU NAL 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 T HIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 21. AS A RESULT ASSESSEES APPEAL IS PARTLY ALLOWE D AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (MUKUL SHRAWAT) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED : 30/4/2010 MAHATA/- ORDER PRONOUNCED IN OPEN COURT ON 30/4/2010 13 COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD