JUDGMENT
Arun Tandon, J@mdashThese three appeals have been filed by the assessees against the common order dated November 21, 2014, passed by the Income-tax Appellate Tribunal, Lucknow, in I.T.A. Nos. 612, 401 and 152/Lko/2012 for the assessment years 2007-08, 2008-09 and 2009-10, respectively. The common question of law as raised in all these appeals is as follows:
"Whether, in the facts and in the circumstances of the case, the assessee is entitled to the benefit under section 10B of the Income-tax Act?"
2. The facts are more or less identical in all these appeals. For the purpose of adjudication, the facts as on record of Income Tax Appeal No. 82 of 2015 are being referred.
3. The "appellant company" has set up an industrial undertaking at 118-E, Shyam Nagar, Kanpur. It is a 100 per cent, export unit, as per the certificate granted by the Central Government under section 14 of the Industries (Development and Regulation) Act, 1951. The assessee, during the period under consideration, was engaged in manufacture of "ballistic helmet" and "bullet proof (bullet resistant) jackets" (hereinafter called "helmet and jackets").
4. The assessee claimed the benefit under section 10B of the Income-tax Act, which was denied by the Assessing Officer. But the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee. However, the Tribunal has restored the order of the Assessing Officer. Being aggrieved, the assessees have knocked the door of this court by filing the present appeals.
5. Sri S.K. Garg, assisted by Sri Ashish Bansal, advocate on behalf of the assessees, submitted that the assessee-company being "100 per cent export oriented undertaking" qualifies for exemption on purchase of raw materials meant for manufacturing under section 3B of the Trade Tax Act. Similarly, the exemption under section 10B of the Income-tax Act is allowable to the assessee.
6. On February 25, 2008, a survey under section 133A was carried out at the factory premises of the assessee situated at 118E, Shyam Nagar, Kanpur. Certain documents and books of account were found and seized. On the spot only 17 machines were found installed at the factory premises, though the assessee had claimed that 94 machines were used for manufacture. The 77 machines were found at the "jacket division" of M/s. MKU Pvt. Ltd., 30 UPSIDC, Malwan and Salempur (Rooma). The seized loose papers, i.e., two bills dated March 7, 2005, and March 9, 2005, disclosed engagement of cranes and labours for shifting of hydraulic press machine to Malwan.
7. On the facts of the case, the Assessing Officer opined that the assessee is not a 100 per cent, manufacturing unit, as maximum machines were installed at another division, doing manufacturing on its behalf.
8. Learned counsel contended that the survey can have no bearing on the assessment of MKU (Armours) P. Ltd. for the reason that with effect from April 1, 2007, the entire industrial undertaking of the assessee had been transferred to MKU P. Ltd. with the due approval of the authorities concerned. In other words, the manufacturing actually had been "out sourced". It is also the submission of the learned counsel that the Assessing Officer has wrongly denied the claim under section 10B of the Act. The learned counsel further submits that the assessee is "100 per cent, export unit". Even if manufacturing of some items has been "out sourced" and the assembling is done by the assessee even then the assessee is entitled for the benefit under section 10B.
9. For the purpose, the learned counsel has drawn the attention of this court towards an affidavit dated June 11, 2010, sworn by one Mr. Manish Khandelwal, director of the company, where it is mentioned the commercial production of the 100 per cent, export oriented undertaking was started with effect from November 1, 2004. Some "job work process" was carried out from time to time on "out sourcing basis" after obtaining due permission from the Superintendent (Customs) Central Excise Division-ID, Kanpur. Since the manufactured items, to be exported, were as per the specific requirement of the buyers of the foreign countries so the job work was got done from specialized "out sourcing unit", and such outsourcing work was always under the control and personal supervision of the assessee. All the plant and machinery installed by the company, M/s. MKU (Armous) Pvt. Ltd., were new and were never used previously for any other purpose. It is also the submission of the learned counsel that the managerial and technical staff was available with the assessee for direct control and supervision of the goods to be manufacture through outsourcing.
10. The Commissioner of Income-tax (Appeals) has already verified this fact as mentioned in his order dated July 15, 2010. The Commissioner of Income-tax (Appeals) found that only a part of the manufacturing activity of "ballistic helmets" and "bullet proof (bullet resistant) jackets" was out sourced. The entire raw material needed for the job work was procured by the assessee-company and sent to the site of the job worker with due permission of the excise authorities. The job work was carried out by the job worker, under the supervision of the staff of the assessee. After the job work, the product was returned to the assessee factory, where the final product was assembled, packed and dispatched to the overseas buyers.
11. Learned counsel further submitted that the powers of the first appellate authority are co-terminus with the power of the Assessing Officer as per the ratio laid down in the case of
(i)
(ii)
(iii)
Regarding the allegation of splitting up and reconstruction, he placed reliance on the following judicial pronouncements:
(i)
(ii)
(iii)
(iv)
(v)
12. On the other hand, Sri Dhananjay Awasthi, learned counsel for the Department, has supported the impugned order. On the strength of the written submission, he submits that earlier, the assessee-company was known as A.R. Plimsol. In the year 2004-05, it was renamed as MKU Armor Pvt. Ltd. The assessee has used old machinery. The assessee was not involved in any manufacturing activity. It had "outsourced" the manufacture of the goods and had no direct supervision and control. The assessee is not entitled to the exemption under section 10B of the Income-tax Act. In support of his arguments he relied on the ratio laid down in the following cases:
(i) CCE v. F. Harley and Co. [2010] 4 GSTR 85 (SC) : [2010] 9 SCC 104;
(ii)
(iii)
(iv)
(v)
13. Lastly, the learned counsel for the Department submits that most of the activities are "outsourced" and very small part of the manufacture was undertaken by the assessee. This is established from the fact that the expenses incurred by way of job charges paid to the outsourcing unit during the period under consideration was 8.5 time more than the expenses incurred on wages and salary of the staff of the assessee. A very small amount was spent on power, fuel and water (i.e., Rs. 5.98 lakhs only). The conclusion drawn by the Commissioner of Income-tax (Appeals) is incorrect and the order passed by the Tribunal is reasonable.
14. We have heard both the parties and gone through the material available on record.
For facilitation, section 10B of the Income-tax Act is reproduced below:
"10B.(2) This section applied to any undertaking which fulfils all the following conditions, namely:--
(i) it manufactures or produces any articles or things or things computer software;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose."
15. From the records, it appears that during the year under consideration, part of the activity connected with manufacturing of "ballistic helmets" and "bullet proof (bullet resistant) jackets" had been outsourced, for which job charges had been paid to the job worker, who were none else but the sister concern of the assessee, by the name of MKU Pvt. Ltd. The job charges were paid in continuation to the similar job charges paid in the preceding two assessment years, i.e., the assessment years 2005-06 and 2006-07 which were the "1st year" and the "2nd year", respectively, of the existence of the "100 per cent, export oriented undertaking". Copies of the agreements executed for the job works connected with the manufacture of "ballistic helmets" and "bullet proof (bullet resistant) Jackets" effecting from April 1, 2006, had been placed before the Tribunal, which form part of paper book before us also. In the said agreements, overall flow chart for manufacturing of ballistic helmets and bullet proof (bullet resistant) jackets disclosed. Manufacture of ballistic helmets involves 14 stages and the manufacturing of bullet proof (bullet resistant) jackets involves 7 stages. Out of such 14 and 7 stages, only the fifth and the third stages, respectively, had been outsourced. Rest of the activities were carried out in the industrial site of the assessee situated at 118E, Shyam Nagar, Kanpur.
16. We have also examined the manufacturing process of the final products with the help of photographs at various stages. During the course of arguments, learned counsel for the assessee points out that "outsourcing" was limited to certain well defined "process" and did not cover manufacturing of the entire products. Looking to very critical and sensitive nature of final products the entire outsourcing was under the control and supervision of the managerial and technical personnel of the assessee-company available with it.
17. Under the circumstances the "outsourcing" was limited only to a part of the overall manufacturing activities as were needed to be carried on for the purpose of finished products in the form of ballistic helmets and bullet proof (bullet resistant) Jackets. Section 10B provides for exemption on manufacture or produce. The word "manufacture" has been defined as under:
"(a) Section 10AA, Explanation 1.--...
(iii) ''manufacture'' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005.
(b) Section 2(r) (Special Economic Zones Act, 2005) ''manufacturer'' means to make, produce, fabricate, assemble, process or bring into existence by hand or machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining;
(c). Inserted by the Finance (No. 2) Act, 2009
section 2. (29BA) ''manufacture'', with its grammatical variations, means a change in a non-living physical object or article or thing�
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure."
In the case of
"The assessee imported innumerable components of a tractor. These various parts were first assembled into 23 components, which 23 components when assembled together in turn resulted in a tractor. The components imported by the assessee did not have propulsion and could not be called a tractor. The assessee claimed that its activity required labour, skill and management and that it was an industrial undertaking which manufactured or produced articles and was entitled to relief under sections 80-I and 80-J of the Income-tax Act, 1961. The Tribunal held that the assessee was an ''industrial undertaking'' in so far it was engaged in assembling of tractors:"
In the case of
"that tendu leaves and tobacco, which are used as inputs, do not retain their independent identity after the bidis are rolled after undergoing several process. Commercially, the final product is known in the trade as a distinct commodity and has a separate market. Furthermore, merely because an assessee gets the work done through contract workers, in other words, enters into a contract with the workers and pays them per piece the relief could not be denied. The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee. In relation to the additional reason given by the Assessing Officer for denying relief under section 80-I of the Act, both the Commissioner (Appeals) and the Tribunal had found that, for the purposes of determining whether a unit is a small scale industrial undertaking or not, while ascertaining the monetary limit laid down in the provision, all assets of the business were not to be taken into consideration. The Tribunal was justified in treating the activities carried on by the assessee as amounting to manufacture of bidis, entitling the assessee to relief under sections 80HH and 80-I."
In the case of
"An assessee would be said to be engaged in the manufacturing activity if he is doing a part of the manufacturing activity by himself and, for rest of it, engages 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 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, 1961."
In the case of CIT v. Elgi Ultra Industries Ltd. T.C. (A.) Nos. 451 of 2006 and 218 and 219 of 2007, dated August 10, 2012, it was observed that the assessee himself is not personally engaged in manufacture, would not disentitle an assessee from claiming the relief as one engaged in manufacturing activity, so long as the assessee exercises control in work entrusted to job workers and the assessee will be entitled for benefit of manufacturing:
"The order of the authorities below show that the assessee exercised supervision and control in the manufacturing of the parts done by the job workers on the materials supplied by the assessee in according to the specification in the dyes supplied by the assessee. They were subjected to quality control too. Thus, even though the assessee had not employed its own employees, yet, the fact is that at every stage the assessee had extracted control over the job work as though they were employees of the assessee. Given the fact that the dyes and the materials were given by the assessee to the job workers, who had merely bestowed their labours, the case of the assessee that it qualify for relief under section 80-IA has to be accepted."
In the case of
"that though the assessee as a publisher would not be doing more than getting the manuscript and preparing the same for printing and book binding, yet the fact that printing and book binding was done by some else did not imply that someone else was the manufacturer. It was the business of the assessee to get the books manufactured by getting the manuscript, designing the nature of the book, finishing the anticipated product and then selling the product after getting it made. Therefore, the assessee was an ''industrial company'' within the meaning of section 2(6)(c) and was entitled to be assessed at the concessional rate of tax in accordance with the provision of the Act."
In the case of
"In order that a publisher of books should be a manufacturer of books it is wholly unnecessary for him to be a book binder himself. A publisher may get the books printed by any printer but the printer is not a manufacturer but a mere contractor."
In the case of
"The assessee was a partner in two firms which were engaged in the manufacture of biris. The assessee claimed that the firms were ''industrial undertakings'' as defined in the Explanation to section 5(1)(xxxi) of the Wealth-tax Act 1957, and the assessee''s share in the firms was exempt from tax in view of section 5(1)(xxxii) of the Act. The method of manufacture of biris involved the following process. The firms purchased tendu leaves and tobacco and these were given to local contractors for getting the biris manufactured. The labourers cut the useless portion of tendu leaves from all side and then cut the leaves to small pieces of required size. These pieces were then rolled in the shape of biris. Tobacco was filled and the top portion was closed and the biris were tied up with a thread. The biris were then brought to the factory of the firms and were heated for a short time. They were then packed in bundles of 25 each, wrapped in specially designed paper bearing trade mark and label of the firms. Therefore, from the tendu leaves and the tobacco, a new and different article, viz., biris, emerge as a result of various processes to which the tendu leaves and the tobacco were subjected. Therefore, the firms were industrial undertakings as contemplated by the Explanation to section 5(1)(xxxi) of the Act and the assessee was entitled to the exemption of the value of his shares held in the two firms under section 5(1)(xxxii) of the Act."
18. In the light of the above discussion, we are of the view that the assessee is a manufacturer of the "ballistic helmets" and "bullet proof (bullet resistant) jackets". Only a part of the manufacturing activities was got done by the assessee from outside agency and that to under the direct control and supervision of the managerial and technical staff available with the assessee. Therefore, even oil the basis of such an outsourcing the assessee has to be held to be the "manufacturer" of the products for which it had been approved as 100 per cent export oriented undertaking. Accordingly, it cannot be denied the benefit of exemption under section 10B of the Act. In the instant case, a new product has come out at final stage. It is not the case of changing the label or the cover of the product. When totally new product came into existence after the entire process then we are of the view that the assessee is entitled to the benefit of section 10B of the Act. We set aside the impugned order passed by the Tribunal and restore the order passed by the first appellate authority pertaining to the benefit of exemption under section 10B of the Income Act.
19. Having answered the core issue in favour of the assessee we proceed to deal with the Appeals No. Defective 81 of 2015 and 36 of 2015 which relates to MKU P. Ltd. for the assessment years 2008-09 and 2009-10. In these two appeals, the Tribunal has held that since the benefit under section 10B had not been allowed to the predecessor company, i.e., MKU (Armours) P. Ltd. the same cannot be allowed to the successor, i.e., MKU P. Ltd. This objection of the Tribunal gets overturned in view of our finding that MKU (Armours) P. Ltd. are entitled for exemption under section 10B of the Income-tax Act.
20. Suffice it to say that the view of the Tribunal is wholly misconceived. It may be mentioned that in terms of the agreement dated March 19, 2007, effective from April 1, 2007, the entire industrial undertaking, lock stock and barrel had been taken over by MKU P. Ltd. with due approval of the competent authority as designated under Industries (Development and Regulation) Act, 1951, and the excise authorities. The premises of MKU (P.) Ltd., the successor had duly been approved, licenses were surrendered by the former in favour of the later. The name of implementing agency i.e. MKU P. Ltd. was substituted in place of MKU (Armours) P. Ltd., by the authorities. Therefore, it is not a case where part of the machines have been transferred from MKU (Armours) P. Ltd. to MKU P. Ltd. The provisions contained in sub-section (7A) as have been inserted with effect from April 1, 2004, with simultaneous abolition of sub-section (9) and sub-section (9A) of section 10B, provides for continuance of benefit in favour of the successor unit, for the unexpired period.
21. The intention behind the insertion of the said sub-section (7A) was clarified by the Central Board of Direct Taxes Circular No. 7 of 2003, dated September 5, 2003, reported in [2003] 263 ITR (St.) 62, 77 which reproduced hereunder:
"21. Allowing deduction under sections 10A and 10B, to the resulting entity in the case of amalgamation or demerger:
21.1 The deduction under sections 10A and 10B, are not allowed to the assessee where the ownership or the beneficial interest in the undertaking is transferred by any means, due to the provisions of the sub-section (9) of section 10A and sub-section (9) of section 10B. However, this condition is not applicable in certain cases, such as where a firm or sole proprietary concern is succeeded by a company as a result of the reorganization of the business, or where as a result of change in ownership, the resultant entry is a public limited company or a venture capital company.
21.2 With a view to give boost to the export-led growth, and to eliminate the hurdles in the mergers and acquisitions (M&A) and other modes of business restructuring, a new sub-section (7A) in section 10A and a new sub-section (7A) in section 10B have been inserted to provide that where an undertaking of an Indian company is transferred to another company under a scheme of amalgamation or demerger, the deduction shall be allowable in the hands of the amalgamated or the resulting company. However, no deduction shall be admissible under this section to the amalgamating company or the demerged company for, the previous year in which amalgamation or demerger takes place. As a consequence, sub-section (9), sub-section (9A) and the Explanation below thereto in sections 10A and 10B, become redundant and have been omitted.
21.3 The amendments will take effect from 1st April, 2004, and will, accordingly, apply in relation to the assessment year 2004-05 and subsequent years, (sections 7(e), 7(f), 7(g), 8(b), 8(c) and 8(d))."
22. Needless to mention that a circular, particularly beneficial circular, instruction, press note, etc., as issued by the Central Board of Direct Taxes have got a binding effect on the tax administration and it is obliged under the law to give effect to the same unhesitatingly, as per the principle laid down in umpteen number of case law decided by the hon''ble apex court, for example:
(i)
(ii)
23. Reference may also be had to law laid down in the following judgments:
1.
"There is no other provision for disallowance of benefit to assessee under section 10A of the Act. The Commissioner of Income-tax (Appeals) in his order has quoted the relevant extract from the Board''s Circular No. 7 of 2003, dated September 5, 2003, and has come to the conclusion that the Board agrees that the benefit is attached to the undertaking and not to owner thereof. It is an acknowledged legal position that beneficial circular issued by the Central Board of Direct Taxes is binding on the department. Reference can be made in this regard to a recent judgment of Supreme Court in
''21. Now, we shall proceed to examine the effect of the circulars which are in force and are issued by the Central Board of Direct Taxes (for short, "the Board") in exercise of the power vested in it under section 119 of the Act. Circulars can be issued by the Board to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income-tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act (refer to
It is not disputed before us that for the earlier assessment years exemptions have been granted to the undertaking. In this view of the matter, the Tribunal was justified in holding that the assessee is entitled to get exemption under section 10A of the Act, 1961. The argument of the learned counsel for the Department that since the proprietorship has been converted into partnership, therefore, this disentitles the assessee to claim benefits under section 10A of the Act, 1961 does not borne out either from the plain language of subsections (9) and (9A) of section 10A of the Act, 1961, or in view of the Circular of the Central Board of Direct Taxes referred to above. No substantial question of law is involved in the appeal."
(Section 10A and section 10B are in pari materia with each other)
2. Woco Motherson Elastomer Ltd. Elastomer Ltd. v. Deputy CIT reported in 36 Taxmann.com 534 : [2013] 59 SOT 147(Delhi-Trib) (judgment dated May 17, 2013) .
"The main objection of the Assessing Officer is regarding splitting of the business. The Assessing Officer held that assessee company has been formed and has taken over the assets of the existing business by splitting the business of M/s. MSSL. While holding such a finding, the Assessing Officer has ignored the fact that it was not a case where a part of plant and machinery or other assets belonging to an undertaking were transferred. The whole undertaking consisting of all assets and liabilities as a going concern was acquired by the assessee company. It cannot be said that the undertaking has been formed by splitting or re-construction of business already in existence."
3.
"Conclusion: The assessee having acquired its undertaking from one M/s. KGISL with all the assets and liabilities as a going concern and the said KGISL enjoying the benefits of section 10A, the assessee as a software technology park was entitled to relief under section 10A even though it claimed relief under section 10B and alternatively under section 10A; prohibition under section 10A(2)(iii) was not attracted as the transfer was not that of plant and machinery alone but of sale of whole business unit.
Cases referred to
Circular referred to
Circular No. F. No. 15/5/63-IT (A-1) dated December 13, 1963
Circular No. 7 of 2003, dated September, 5, 2003."
4.
"The expressions employed in sub-section (1) of section 80-IB ''any business'', ''such business'' and ''eligible business'' read with expression ''in the case of an industrial undertaking'' as occur in sub-section (3) of section 80-IB, in our opinion, it is a clear indication that the deduction contemplated under this provision is relatable to the unit/business/industrial undertaking. Therefore, whosoever is running the unit/industrial undertaking having domain over it, is entitled for deduction as contemplated by section 80-IB of the Act.
In so far as sub-section (12) of section 80-IB of the Act is concerned, that is applicable only in the case, where there is an amalgamation or demerger. That does not mean that a transfer of industrial undertaking by any other mode is not entitled to claim deduction under section 80-IB. In other words, it would not be correct to say that deduction under section 80-IB is available only where transfer of the unit/industrial undertaking is under the scheme of amalgamation or demerger. It is not in dispute that the unit/industrial undertaking, in the present case, enjoyed the deduction under section 80-IB from April 1, 1993 till August 30, 2000, i.e., till the unit/industrial undertaking was transferred to the assessee.
(this sub-section (12) of section 80-IB corresponds to sub-section (7A) of section 10B)."
24. In the case of
25. Thus the question of law are answered in favour of the assessee and against the Department in all these appeals. In the result all the appeals filed by the assessees are allowed. No costs.
