Maintenance of separate books of accounts would indicate that each of the units is carrying on business independently which can be brought to tax. In the facts of the present case no independent accounts are 120 ITA No. 72&85/PNJ/2012 maintained. Hence the assessee is not entitled to claim deduction u/s.10B of the Act.
Case Law:
1. Civil Appeal No.2978/2008 & Civil Appeal No.1070/2009 M/s. Arisudana Spinning Mills Ltd., Vs. CIT, Ludhiana
2. Civil Appeal No.1679/2004 CIT, Guwahati VS Bongaigaon Refinery & Petrochemicals Ltd.
8. Assessee in respect of Codli Unit had claimed deduction from the assessment year 2005-06 From the assessment year 2005-06 to the assessment year 2008-09, the original orders passed by the Tribunal is not on merits. It has proceeded to grant relief on other issues. Hence the orders passed in the earlier assessment years cannot be treated as a binding precedent.
Case Law:
1. Bharat Sanchar Nigam Ltd., & Anr. VS Union of India & Ors.
(2006) 282 ITR 273 (SC)".
42. We have carefully considered the rival submissions along with the orders of the tax authorities below as well as the material referred before us from the paper books. We have also gone through the various case laws as relied upon from both the sides. In respect of all the three units established by the assessee which are approved as EOU by the competent authority, the assessee has claimed exemption u/s 10B of the Income-tax Act, 1961, which was denied by the Revenue. The main reason in all the three units for disallowing exemption u/s 10B in addition to the other reasons is that the assessee is not engaged in any ‟manufacture‟ or „production‟ of article or thing. Therefore, the first issue to be decided in this case is whether the assessee is engaged in any manufacturing or production of any article or thing in all the three units, namely, EOU units at Amona, Chitradurga and Codli. The processes undertaken at each of these units are as under:
Processes undertaken at Amona Beneficiation Plant i. The crude iron ore (Run of Mines - ROM) extracted from the mines is received at the plant.
ii. Crude iron ore is fed to the Hopper.
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iii. Screening of crude iron ore is done on a vibrating screen or the
"vibrating grizzly feeder" having opening of the particular desired size. Thus, oversized products get separated.
iv. The overflow from the vibrating grizzly, i.e., oversized product goes to Primary Jaw Crusher through conveyor belts.
v. The oversized crude iron ore is crushed in the Primary Jaw Crusher to reduce the size of lumps.
vi. Crushed crude ore lumps are conveyed to another vibrating screen, called Banana Screen, which is a double deck screen (- The Vibrating Screen is a double deck system. The top deck of the same is calibrated at 30mm size and bottom deck is calibrated at 10mm size. The output is segregated into the material size of +30mm (<30mm >10mm) and <10mm.).
vii. The +30mm product from Banana Screen is moved to the secondary crusher, and is moved back again to the Banana Screen for re-segregation. These processes are repeated till the desired sizes of crude ore lumps are obtained.
viii. The " <30mm > 10mm " fractions are taken to the log washer, which is a „wet‟ process, and by which unstable lumpy particles and coated fines are removed from the surface of lumps.
ix. The output is wet screened for separation of < 30mm > 10mm lumps. The balance material, which is < 10mm fraction‟ is passed into a spiral classifier.
x. Here segregation of material (< 100mm) is mechanically done according to gravity. The heavier material, which is collected as underflow, is stacked as „classifier fines‟. The overflow from the classifier, which constitutes lighter material, is pumped to two stage cyclones - primary and secondary.
xi. Primary cyclone segregates high grade fines which are removed as an underflow, and the overflow is fed to secondary cyclones to recover further iron ore fines. Primary and secondary cyclone underflow is dewatered by slow speed spiral classifiers, and collected as fines.
xii. The secondary cyclone‟s overflow is a waste, called "tailings"
and it is discharged into the tailing pond.
xiii. Iron ore lumps and fines are then moved through conveyor belts to the Barges, which are stationed on the river bank besides the plant. Here, different sizes of lumps having different chemical and physical compositions are mixed mechanically as per the product composition ordered by the overseas buyers.
122ITA No. 72&85/PNJ/2012 Processes undertaken at Chitradurga Beneficiation Plant i. The crude iron ore (Run of Mines - ROM) extracted from the mines is received at the plant.
ii. Crude iron ore is fed to the Hopper. iii. Screening of crude iron ore is done on a vibrating screen or the
"vibrating grizzly feeder" having opening of the particular desired size. Thus, oversized products get separated.
iv. The overflow from the vibrating grizzly, i.e., oversized product goes to Primary Jaw Crusher through conveyor belts.
v. The oversized crude iron ore is crushed in the Primary Jaw Crusher to reduce the size of lumps.
vi. Crushed crude ore lumps are conveyed to another vibrating screen, called Banana Screen, which is a double deck screen (- The Vibrating Screen is a double deck system. The top deck of the same is calibrated at 30mm size and bottom deck is calibrated at 10mm size. The output is segregated into the material size of +30mm (<30mm >10mm) and <10mm.).
vii. The >30mm product from the Screens is moved to the secondary crusher, which is moved again to the secondary and tertiary screens for final screening of calibrated ore.
viii. The secondary and tertiary screens both have a top deck of 30mm calibration and the bottom deck of 10mm calibration. The 10mm to 30mm calibrated product from the screen is segregated and stacked separately to be sold as lumps.
ix. The < 10mm product is collected as „fines‟ in another product bunker from where it is sent for stacking or dispatch. The < 10mm product from primary screen sometimes goes to another fines screen for further screening at 5mm, if required.
x. Iron ore lumps and fines are then moved through conveyor belts to the Barges, which are stationed on the river bank besides the plant. Here, different sizes of lumps having different chemical and physical compositions are mixed mechanically as per the product composition ordered by the overseas buyers.
Processes undertaken at Codli Ultra Fine Recovery (UFR) Plant i. Scavenger (secondary) cyclones overflow is a waste product called „tailings‟, but at this 100% EOU this waste generated by 123 ITA No. 72&85/PNJ/2012 the iron ore beneficiation plants is further processed and low grade iron ore is produced. The tailings are first de-slimed by 5" de-sliming cyclone equipment. In order to increase the pressure (30 psi) as required for the de-sliming operation, high capacity slurry pumps are used. The said process result is a finer size cut-off which is required to facilitate magnetic separation.
ii. The de-slimed overflow from the above process is fed to a 3 mm vibratory screen for separation of foreign matter, if any, and is classified as screened slurry. The de-slimed overflow consisting of „gang‟ material is channeled out to the tailing thicker.
iii. Screened slurry is then fed to the Medium Intensity Magnetic Separator, which operates at around 7 Tesla of magnetic intensity. This instrument recovers the Magnetite and Martite material present in the slurry feed. This product is called as „MAGS‟.
iv. The overflow from MIMS, i.e., non-mags, is again treated in a very high intensity magnetic environment, which facilitates further recovery. To achieve this, Ferrous Wheel Separator, which generates magnetic intensity of around 14 Tesla is used. With this equipment very fine Hematite particles are recovered from Mags.
v. Mags from both MIMS and Ferrous Wheel are the agitated for homogeneous mixing with the help of Agitator, and then de- watered with the help of Ceramic Filter. The de-watered "Ultra Fines", which is the final product, is stacked at a shed erected for the purpose.
vi. Non-mags from MIMS / Ferrous Wheel and De-sliming Cyclone overflow is treated at the tailing thicker for water recovery before the same is sent to the tailing pond as waste material.
42.1 Each of these units was approved as EOU unit by the Development Commissioner on the following dates, which were ratified by the Board of Approval on the dates detailed as under respectively:
Amona Chitradurga Codli
Board of PER:44(2007)IA- 1/64/2007:PER: PER:303(1997)
Approval (LOP II/39/07-08
No. for 100% EOU:KR:CSZ/243 EOB/318/97
EOU)
Board of 28/03/2008 15/02/2008 27/10/1997
Approval (LOP
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Date)
Ratification by SEEPZ/IA- 1/64/2007/EOU: IA-II/28/(57)
the Board of II/44/2007-
Approval (Letter 08/6053 CSEZ/225 /05-06/2406
No.)
Ratification by 06/07/2009 21/02/2011 03/04/2005
the Board of
Approval (Letter
Date)
42.2 On accepting the application moved by the assessee requesting personal visit of Bench Members to its Amona Plant both members in presence of Mr. Seshachala (DR) Mr. Sanjeev Kumar Bindal (AR) and the officials of the IT Department and the assessee company made an on sight inspection of the said plant of M/s Sesa Goa Ltd., located at Amona Village, North Goa between 03.00 pm to 04.30pm 0n 19.12 12. The purpose of inspection was to understand the type of plant & machinery installed at the iron ore Beneficiation plant and also the processes undertaken for production of iron ore Iron ore Beneficiation plant. This iron ore beneficiation plant, in open, we found spread over an area of about 100 square meters but no production activity was going on. It was informed that the plant was not running because of the ban on mining and processing activities since September, 2012. Heaps of mud mixed with boulders of various sizes, were found stacked in front of the plant. It was told that the heaps of mud and boulders were in fact „crude or‟ also called „Run-of Mile‟ (ROM is brought from the mines situated about 10-15 kilometers from the plant and fed to the plant.
42.3 The boundaries of the plant consisted of retaining walls having a steep face of about 10 meters on two sides, facing of barbed wires on one side and open space in front where the final product is stored. The starting point of the plant as shown to us is a „Hopper‟ which is made up of Mild Steel (MS) plates wherein ROM is fed to the plant. The hopper was found fitted at the edge of the retaining wall of about 10 meters height. It was explained that the Rom is poured by trucks directly into the hopper and is taken for crushing through a conveyor system, after which it is carried to the screens of various sizes, yet 125 ITA No. 72&85/PNJ/2012 again through an organized mechanism of conveyor belts. The whole plant we noted consists of huge steel structures of about 6-10 meters height on which the banana screen and the conveyors were found installed. The process of crushing and screening were told to be repeated till the desired sizes were obtained. It was explained that the products then pass through log washers where the impurities are further removed. Some of the conveyors were found open to sky whereas some were found covered with Galvanized Iron (GI) sheets. It was seen that the conveyors were made to carry ore of various sizes from the screens to the log washers where the output is washed. Log washer was found to be a rectangular drum fitted with a spiral pinion made of MS plates. The final product, „lumps and fines‟ were noted to be totally physically different in appearance and use from the initial input product. We were also shown metallurgical coke plant but that is not relevant for exemption u/s 10B.
42.4 The hearing was earlier concluded on 20/12/2012 after hearing counsels from both the sides continuously on different dates, i.e., from 21/11/12 to 20/12/2012. Both sides have exhaustively argued and put up their submissions and even requested to file the synopsis, which Bench permitted. Accordingly, synopses were filed from both the sides. After the concluding of the hearing while the case was under dictation, the revenue moved an application dated 18/01/2013 on 21/01/2013 for referring the issue whether the assessee is engaged in production or not in all the three units to Special Bench as in their opinion this issue is duly covered in their favour by the ITAT Panaji Bench in the case of Chowgule & Co. for the AY 2002-03 in ITA No. 162/PNJ/2006 in case this Tribunal wanted to take a different view. The case immediately on 21/01/2013 was de-heard and was re-fixed for hearing the application of revenue dated 18/01/2013 for 19/02/2013 so that both the parties may be given sufficient opportunities. On that date Ld. CCIT personally appeared and argued in detail how the case was duly covered by the decision of this Bench in the case of Chowgule & Co. (P) Ltd. for the AY 2002-03 in ITA No. 162/PNJ/2006 read with Misc. Application No. 23/PNJ/2007 dated 19/07/2007. He carried us through the order of this 126 ITA No. 72&85/PNJ/2012 Tribunal in the case of Chowgule & Co. as well as MA No. 23 even the written submissions along with paper book was also filed.
42.5 The written submissions read as under:-
"1. Facts of the case: (i) M/s Sesa Goa Ltd., is claiming old but renovated benefication plants as newly established 100% EOU manufacturing or producing any article or thing.
(ii) These units do not extract iron ore themselves.
(iii) Entire profit from export from these units is taken as exempt u/s 10B. No profit has been allocated to other activities, e.g. extraction etc. Section 10B(7) has totally been disregarded by not taking the input cost of iron ore at a market rate.
2. ITAT Panaii Bench's view : ITAT, Panaji bench Interpreted CIT vs. Sesa Goa Ltd.,(266 ITR 126 (Bom) in the case of ACIT Circle-2 vs. M/s Chowgule & Co. Ltd., in ITA No. 162/PNJ/ 2006 and ITA No. 184/PNJ/2006. Production in relation to extraction and processing of Iron ore has been held as under.
'The Supreme Court in fact has held in the case of Sesa Goa Ltd., that "extraction and processing of mining ore amounts to production". One should read the expression "extraction" and "processing" together. The ruling of the Supreme Court is not that extraction as well as processing, independently amounts to production, (emphasise supplied). If an assessee carries on the business of extracting mineral ore, it amounts to manufacture or production as per the above judgement. If the same assessee in addition to extraction, also process the mineral ore, the combined activity obviously amounts to production/manufacture. But processing the mineral ore without extraction of the ore has not been held to be production / manufacture by the Supreme Court in the said decision of Sesa Goa."
"In the present case also, the process carried on by the assessee is providing value addition to Iron ore by enhancing its quality. It is in fact upgrading the quality for apt industrial use. Even though the process employed by the assessee might require deployment of huge capital and large plant and machinery, such things do not change the basic character of the activities carried on by the assessee- company. What is received by the assessee-company is iron ore; what is processed by the assessee-company is iron-ore and again what is sent outside the assessee- company is still the iron ore. No new product comes into existence. In this line of trade, different grades of iron ore will have different nomenclatures and names. But those expressions of convenience do not mean that the assessee has produced or manufactured a new article or thing."
The decision of Hon'ble ITAT in MA No.23/PNJ/2007 has not changed the above position regarding "production" in the case of iron ore.
3 Why Special Bench : i. Observation of the bench during the course of hearing of the
present case were that the decision in ITA No.162/PNJ/2006 and ITA No.1841/PNJ/2006 have been reversed and the same cannot be applied to the case of the assessee-company.
127ITA No. 72&85/PNJ/2012
ii) However, There is no reversal of the judgement. In fact, no ITAT can reverse or review its own decision. Only mistakes apparent from record can be rectified,
iii) If this view is taken then it would be contrary to the earlier findings of ITAT in Chowgule's case.
iv) The decision of Gujarat High Court in the case of Affection Investment Ltd., Vs. ACIT.reported in 222 CTR 2009, Sayaji Iron & Engg. Co. Vs. CIT (2002) 172 CTR (Guj). 339 (2002) 253 ITR 749 (Guj) and decision of Madras High Court in the case of CIT Vs. L.G. Ramamurthi reported in 110 ITR 453, clearly mandates that the ITAT has to refer to the Larger Bench on the issue if it is to take a contrary view on a decision rendered by the bench of the same ITAT in the earlier decided cases. Further, Supreme Court in the case of ITAT vs. DCIT reported in 218 ITR 275 held that President, ITAT can suo-moto or on request from any party can constitute Spl. Bench.
It is requested that an opportunity of being heard is given to us, so that our case is properly explained before your honours".
42.6 During the course of the hearing, the Bench pointed out that Ld. Departmental Special Counsel has already taken the argument that the case of the revenue on this issue is duly covered by the decision of this Bench in the case of Chowgule & Co. ITA No. 162 and in case this Tribunal wanted to differ the matter be referred on this issue for constituting a Special Bench. The Bench never observed that the case is covered or not covered by the decision in the case of Chowgule & co. The Ld. AR on the contrary objected to the admission of this application as it will tantamount to re-hearing of the case for which hearing had already been concluded. In this regard he relied upon certain decisions such as M/s Roger Enterprises Pvt Ltd. Vs. DCIT SPL. Range 5, New Delhi ITA No. 1515,1516,1517/del/97 dt. 8.5.2003, Denso India Ltd. Vs. JCIT, TDs Range 22, New Delhi ITA Nos. 3233 to 3242/Del/2003 dt. 2.9.2004 and that of Madras High Court in the case of S Govindaraja Mudaliar Vs. Income Tax Appellate Tribunal 206 ITR 62 but on the basis of natural justice as the order was not finalized and especially when CCIT had personally appeared, we permitted CCIT to argue on this application. The CCIT carried us to the order of the ITAT in ITA No. 162 and 184 in Chowgule and Company and also the MA No.23 order to press that the Coordinate Bench of this Tribunal has taken the view that extraction and processing of iron ore is necessary for holding that assessee has manufactured or produced an article or thing. Mere processing of iron ore will 128 ITA No. 72&85/PNJ/2012 not tantamount to be manufacture / production. The decision of co-ordinate bench dated 12.7.2007 is binding on us. This finding of coordinate bench has not been reversed by the order passed in M.A No.23 dated 19.7.2007. It was vehemently contended, that in case this bench want to take a different view than that has been taken by the co-ordinate bench in their order dated 12.7.2007, this issue be referred to the Special Bench. He relied in this regard on the written submissions. Ld. AR on merit relied upon the earlier decisions referred to by him during the course of hearing. He reiterated and relied on the decision of Special Bench in the case of Madhu Jayanti International Ltd. and Others Vs. DCIT (SB)(Kol) (Supra) and that of Kerala High Court in the case of Tata Tea as well as decision of the Supreme Court earlier referred to. His main contention was earlier taken was that subsequent to the decision of Chowgule & Co. Panaji Bench, a number of decisions have been decided by the Special Bench, High Court and Supreme Court, which are superior forum than the division bench of the Tribunal on the issue whether the processing of input amounts to manufacture or production. We will decide this issue subsequently as at this stage without discussing the relevant provisions of the Act, we cannot form an opinion whether the processing of iron ore to make it fit for export amounts to manufacture or production.
42.7 In our opinion, the common issue involved on the facts of the case in the case of the assessee is whether all the three units in respect of which the assessee claimed the exemption u/s 10B are engaged in any manufacture or production of article or thing for the purpose availing of exemption u/s 10B. If engaged in processing, whether assessee is entitled for exemption u/s 10B in respect of all these three units. The nature of activities in the case of Amona plant as well as Chitradurga is similar as explained in the earlier paras. Both these units as well as Codli plant are approved as 100% EOU units. The necessary Board approvals are placed in respect of each unit by the assessee on record. For Codli Unit, approval was given initially for five years, which was subsequently extended to which we are satisfied as the revenue did not prove that the letter issued is bogus or forged one. To decide the issue whether all these units are engaged in any manufacturing or production of article or thing, it is necessary to refer to the relevant provisions of the Income-tax Act, 1961.
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43. Provision of sec. 10A of the Act which deals with the special provisions in respect of the newly established undertakings in free-trade zone, etc., and sec. 10AA of the Act which deals with the special provisions in respect of the newly established units in special economic zones; and also sec. 10B of the Act which deals with the special provisions in respect of the newly established 100% export oriented undertakings were inserted by the Finance Act, 1988 w.e.f. 01/04/1989. Sec. 10B provides that any profits and gains derived by an assessee from a 100% EOU shall not be included in the total income of the assessee. This provision applies to any undertaking which manufactures or produces any article or thing. Explanation (i) to sec. 10B provides that the expression „100% Export Oriented Unit‟ means an undertaking which has been approved by the Board appointed in this behalf by the Central Government in exercise of the powers confirmed by sec. 14 of the Industries (Development &Regulation) Act, 1951 and the riles made there under. Explanation (iii) which was there at the time of the said sec. 10B defined the word „manufacture‟ for the purpose of the said section to include any - (a) process or (b) assembling or (c) recording of programme on disc, tape, perforated media or other information storage device. Thus, „process‟ was included within the word manufacture for the purpose of sec. 10B. Explanation (iv) of the said sec. 10B further provided that the word „produce‟ for the purpose of said section, in relation to any article or thing shall include production of computer programme. CBDT vide its circular no. 528 dated 16/12/1988 176 ITR ST. 154 explained the [provisions enacted by the Finance Act, 1988 under para 8.2 of the circular. In this circular, CBDT had clearly explained that the said new sec. 10B had been inserted in the statute book with a view to provide further incentive for earning foreign exchange so as to secure that the income of a 100% EOU shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under this new section was similar to the one provided under sec. 10A of the Act to industrial undertaking operating under the free-trade zone. It was also clarified therein that the expression „manufacture‟ for the purpose of both sections 10A and 10B of the said Act would include any processing or assembling or recording of 130 ITA No. 72&85/PNJ/2012 programme on disc, tape, perforated media or other information storage device.
43.1 This definition of „manufacture‟ was removed when sec. 10A and 10B of the Act were amended by the Finance Act, 2001 w.e.f. 01/04/2001. Sections 10A and 10B of the Act were further amended by the Finance Act, 2003 w.e.f. 01/04/2004 and the definition of „manufacture‟ was inserted as under:-
―Explanation (iv) - For the purpose of this section, ‗manufacture or produce' shall include the cutting and polishing of precious and semi-
precious stones.‖ 43.2 The EOUs were allowed to sell 25% production within the country. With a view to rationalize the concession and to phase these out by the end of the assessment year 2009-10, the provisions of sec. 10A and 10B were substituted by the new provisions by the Finance Act, 2000. CBDT vide circular no. 794 dated 09/08/2000 245 ITR St. 21, 34-35 under para 15.3 explained that the deduction u/s 10B would be granted in respect of profits and gains derived by an undertaking which manufactures or produces article or things or computer software and derived profits and gains from the exports thereof. The said exemption was available for a period of 10 consecutive years in a graded manner. The new provisions contained the following additional conditions:
i. The sale proceeds of articles or things or computer software exported out of India, should be received in or brought into India within a period of 6 months from the end of the previous year or within such further period as the competent authority may allow
- Sub-section (3);
ii. The profits derived from the export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion, as the export turnover in respect of such article or things or computer software bears to the total turnover of business - Sub-section (4);
iii. The assessee must furnish in the prescribed form No. 56G, along with his return of income, the report of a Chartered Accountant certifying that the deduction has been correctly 131 ITA No. 72&85/PNJ/2012 claimed in accordance with the provisions of section 10B - Sub- section (5);
iv. Where the assessee avails of the benefits of section 10A or section 10B, it will not be eligible for other tax exemptions available under other provisions of the Act during the period of 10 years - Sub-section (6);
v. ―manufacture‖ shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005.
43.3 Subsequently, Special Economic Zone Act, 2005 was passed by the Parliament in May, 2005, which was brought into effect w.e.f. 23/06/2005. Section 2(r) of Special Economic Zone Act defines the expression „manufacture‟ as under:-
―Manufacture‖ means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinct 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, pisci culture, poultry, sericulture, aviculture and mining‖.
43.4 This definition was adopted by the Legislature in section 10AA w.e.f. 10/02/2006 as adopted by the Special Economic Zones Act, 2005 by inserting Explanation 1(iii) to section 10AA of the Act which reads as under:-
(iii) ‗Manufacture' shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zone Act, 2005.
As per the said definition „process‟ is included in manufacture.
Subsequently, by the Finance Act, 2009 w.e.f 1.4.2009, clause (29BA) was inserted in section 2 of the Income Tax Act, 1961defining the expression "manufacture as under:
―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 132 ITA No. 72&85/PNJ/2012
(b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.
43.5 In Chowgule & Co. Pvt. Ltd. Vs. Union of India (1981) 1 SCC 653 Hon‟ble Supreme Court, after considering the judgment of Hon‟ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay (1959) 10 STC 500 (Bom.), clearly observed on the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted „manufacture or processing or ore for sale within the meaning of section 8(3)(b) and Rule 13 of the Central Sales Tax Act, 1956. Dealing with this question, their lordships held and observed at pages 659 and 660 of the reports as under:-
―It still remains to consider whether the ore blended in the course of loading through the mechanical ore handling plant can be said to undergo processing when it is blended. The answer to this question depends upon what is the true meaning and connotation of the word ―processing‖ in Section 8(3)(b) and Rule
13. This word has not been defined in the Act and it must therefore be interpreted according to its plain natural meaning. Webster's Dictionary gives the following meaning of the word ‗process': ―to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development of preparation for the market etc.; to convert into marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.‖ Where therefore any commodity is subjected to a process or treatment with a view to its ―development or preparation for the market‖, as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity.
The nature and extent of change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the 133 ITA No. 72&85/PNJ/2012 Calcutta High Court in Om Prakash Gupta Vs Commissioner of Commercial Taxes [16 STC 935 (Cal)]. What is necessary in order to characterize an operation as ―processing‖ is that the commodity must as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore processing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical composition demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical composition, because what is produced by such blending is ore of a different chemical and physical compositions.
When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to ―processing‖ of ore within the meaning of Section 8(3)(b) and Rule 13.
It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities for such ore on the conveyor belt of the mechanical ore handling plant, but to our mind it is immaterial as to how the blending is done and what process is utilized for the purpose of blending.
What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical composition is a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions.
Thus the Hon"ble Supreme Court accepted that there is change in chemical compositions after processing of the iron ore in this case.From the said decision of the Apex Court, it is apparent that Hon‟ble Apex Court held even blending of iron ore for the purpose of export involves change in the chemical and physical composition of iron ore. But if we look to the facts in the impugned case of the assessee, the assessee is not only blending iron ore but carrying out various processes as to make iron ore called crude ore useable to Ispat Industries. The activity of the units of the assessee for Amona and Chitradurga involved converting input into output consist of crushing (crude ore called ROM which appeared to be pieces of rocks as we noted during the course of hearing on the basis of sample shown to us) 134 ITA No. 72&85/PNJ/2012 screening, washing, stacking, loading in barges, river transportation to the boat and export in ships. The finished product which comes out are called lumps and fines which are used for Ispat Industries and brought by the foreign buyers. The finished product technically after processing had different name. As shown to us during the course of hearing we noted that the lumps and fines are entirely different from crude ore. During conversion of crude ore into lumps and fines, waste is generated which is called tailing and discharged into tailing pond. In Codli Unit these tailings which are in liquid form are converted into ultra fine. In our opinion as we noted from this physical sample also crude ore is entirely different from the lumps and fine in physical appearance used and chemical compositions even technically names are also different, similarly what comes as output from the input in codli unit that is also different in physical appearance and chemical composition. We do not agree with the learned D.R that there is not any change in physical and chemical composition of the output than the input as is being processed in all the three units. If we go to section 2(29BA) inserted w.e.f. 1.4.2009, we find clause (b) of this section clearly states that bringing into existence of new and distinct object or article or thing with a different chemical composition or integral structure tantamount to „manufacture‟. The Crude ore once processed is made marketable and had a different chemical and physical composition than the ROM (Crude Ore) even though in common paralance both may be called iron ore. It is no more remains as crude ores. Tailing no more remains tailing but converted into a powder.In view of this clause and the decision of Supreme Court in the case of Chowgule & CO. (Supra), it can be held that the assessee is engaged in these units in „manufacturing‟.
Further, in CIT Vs N.C. Budharaja & Co. (1993) 204 ITR 412 (SC), Hon‟ble Supreme Court further observed that the word "production" is much wider than the word "manufacture". It was said (page 423):
―The word ―production‖ has a wide connotation than the word ―manufacture‖. While every manufacture can be characterized as production, every production need not amount to manufacture...
The word ‗production' or ‗produce' when used in juxtaposition with the word ‗manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in 135 ITA No. 72&85/PNJ/2012 all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.‖ 43.6 In Christian Mica Industries Ltd. Vs. State of Bihar (1961) 12 STC 150 (SC), Hon‟ble Supreme Court defined the word „production‟, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word "production" in the Oxford English Dictionary, as meaning "amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort". For the wide definition of the word „production‟, it has to follow that mining activity for the purpose of production of mineral ores would come within the ambit of the word „production‟ since ore is „a thing‟, which is the result of human activity or effort.
43.7 According to Webster International English Dictionary, the verb "produce" means to bring forward, beget, etc. The juxtaposition of the word "manufacture" with „agriculture‟ and „horticulture‟ is significant and cannot be lost sight of. The intention in employing the word "produced" obviously was to introduce an element of volition and effort involving the employment of some process for bringing into existence some goods.
43.8 In paragraph 7 of its in the case of Chowgule & C0 (P) Ltd. Vs. UOI (supra), Hon‟ble Apex Court also considered the question whether the different brands of tea purchased and blended by the assesses for the purpose producing the tea mixture could be said to have been „processed‟, after the purchase, within the meaning of the proviso to section 8(a), so as to preclude the assesses from being entitled to deduct their turnover under section 8(a), so as to preclude the value of the tea purchased by them. The relevant observations made by the Hon‟ble Supreme Court in this respective are quoted and set out herein below for ready reference:
―7. The Revenue however relied on the decision of the Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [10 STC 500 (Bom HC)]. The assessees in this case were registered dealers in tea under the Bombay Sales Tax Act, 1953 and they purchased in bulk diverse brands of tea and without the application of any mechanical or chemical process blended these brands of different qualities according to a certain formula evolved by them and sold the 136 ITA No. 72&85/PNJ/2012 tea mixture in the market. The question arose before the Sales Tax Authorities whether the different brands of tea purchased and blended by the assessee for the purpose of producing the tea mixture could be said to have been ‗processed' after the purchase within the meaning of the proviso to Section 8(a), so as to preclude the assesses from being entitled to deduct from their turnover under Section 8(a), the value of the tea purchased by them. The High Court of Bombay held that different brands of tea purchased by the assesses could not be regarded as ‗processed' within the meaning of the proviso to clause (a) of Section 8, because there was ―not even application of mechanical force so as to subject the commodity to a process, manufacture, development or preparation‖ and the commodity remained in the same condition. The argument of the Revenue before us was that this decision of the Bombay High Court was on all fours with the present case and if the blending of different brands of tea for the purpose of producing a tea mixture in accordance with a formula evolved by the assesses could not be regarded as ‗processing' of tea, equally on a parity of reasoning, blending of ore of different chemical and physical compositions could not be held to constitute ‗processing' of the ore.
Now undoubtedly there is a close analogy between the facts of Nilgiri Tea Company case [10 STC 500 (Bom HC)] and the facts of the present case, but we do not think we can accept the decision of the Bombay High Court in the Nilgiri Tea Company case [10 STC 500 (Bom HC)] as laying down the correct law. When different brands of tea were mixed by the assessee in Nilgiri Tea Company case [10 STC 500 (Bom HC)] for the purpose of producing a tea mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of mixing, qualitative change, in that the tea mixture which came into existence was of different quality and flavor than the different brands of tea which went into the mixture. There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the Assessee, since in the present case the blending was done by application of mechanical force, but we do not think that is the correct test to be applied for the purpose of determining whether there is ‗processing'. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes ‗processing' we are clearly of view that the blending of ore in the course of loading through the mechanical ore handling plant amounted to ‗processing' of ore within the meaning of Section 8(3)(b) and Rule 13 and the mechanical ore handling plant fell within the description of ―machinery, plant, equipment‖ used in the processing of ore for sale...... ― 137 ITA No. 72&85/PNJ/2012 43.9 In deciding the said question, the Hon‟ble Supreme Court after considering the judgment of the Hon‟ble Bombay High Court in Nilgiri Ceylon Tea Supplying Co. Vs. State of Bombay [1959] 10 STC 500 (Bom), inter alia, observed as follows:
(i) When different brands of tea were mixed by the assessee as in Nilgiri Ceylon Tea Supplying Co.'s case (1959) 10 STC 500 (Bom) for the purpose of purchasing a tea mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing for the different brands of tea, because these brands of tea experienced, as a result of mixing, a qualitative change, in that the tea mixture which came into existence was of a different quality and flavor than the different brands of the tea which went into the mixture;
(ii) There are, it is true, some observations in the judgment of the Bombay High Court which seem to suggest that if instead of manual application of energy in mixing the different brands of tea, there had been application of mechanical force in producing the tea mixture, the court might have come to a different conclusion and these observations were relied upon by the assessee, since, in the present case, the blending was done by application of mechanical force, but that is not the correct test to be applied for the purpose of determining whether the operation constitutes is ‗processing'.
(iii) The question is not whether there is any manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes ―processing‖.
43.10 Therefore, Hon‟ble Supreme Court, in construing the expression "processing" allowed the appeal of the assessee, in Chowgule & Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its "development or preparation for the market" it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. Hon‟ble Supreme Court, in the said judgment, did not consider the expression "manufacture" since the question was decided only on the expression "processing". However, considering the judgment of the Bombay High Court in the case of Nilgiri Tea Co. [1959] 10 STC 500, Hon‟ble Supreme Court observed that, for the purpose of producing a tea mixture of a different kind and quality according to a formula evolved by them, there was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of a qualitative 138 ITA No. 72&85/PNJ/2012 change, in that the tea mixture which came into existence was of a quality and flavor from the different brands of tea which went into the mixture.
43.11 Hon‟ble Kerala High Court had the occasion to consider whether assessee is engaged in the manufacture or production of an article or thing when assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285. The assessee‟s unit was recognized as 100% EOU. The assessee claimed exemption u/s 10B of the Act for the assessment year 1996-97 onwards which was granted up to the assessment year 2000-2001, but for the assessment years 2001-02 and 2002-03 the exemption was denied for the reason that by the Finance Act, 2000, the definition of ‟manufacture‟ which included processing contained in sec. 10B of the Act was deleted w.e.f. 01/04/2001. (The same reasoning as has been given by the coordinate bench in the case of Chowgule & co. ITA 162 & 184 heavily relied by the department under para 14 of their order dt. 12.7.2007.) Hon‟ble High court noted in that case that the Revenue‟s stand is that manufacture or production had liberal meaning under the definition clause contained in section 10B of the Act until its deletion which covers even processing and, therefore, blending and packaging of tea for export was treated as „manufacture‟ or „production‟ of an article qualifying for exemption. Hon‟ble Kerala High Court considered the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s 10A of the Act and units in the free trade zone provided u/s 10AA of the Act and the exemption available to 100% EOU u/s 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature. Hon‟ble Kerala High Court also considered the judgment in the decision of Supreme Court in Tara Agencies (292 ITR 444 (SC) relied upon by the Sr. Standing Counsel for the revenue, wherein Hon‟ble Supreme Court clearly held that blending of tea does not amount to „manufacture‟ or „production‟ of an article or thing, but is only processing. Hon‟ble High Court allowing the appeal of the assessee held that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognized as a 100% EOU division and the Department had no case that the assessee‟s unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products 139 ITA No. 72&85/PNJ/2012 exported were not produced or manufactured in the industrial units of the assessee‟s 100% EOU, it would defeat the very object of section 10B of the Act. (similar to assessee‟s case). Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, would continue to enjoy tax exemption under section 10A of the Act and section 10AA of the Act respectively. The assessee was allowed exemption on the profit derived by its 100% EOU engaged in blending, packing and export of tea bags and tea packets. Hon‟ble High Court held as under:
―The finding of this court is that the purpose of incorporation of section 2(r) of the Special Economic Zones Act, 2005, into section 10AA of the Income-tax Act is to provide a liberal meaning to the word ―manufacture‖ which takes in even blending, refrigeration, etc. It was noticed by this court that the definitions of ―manufacture‖ contained in the above definition clauses are very liberal which takes in even processing like blending. The contention of the counsel for the assessee is that the purpose of removal of the definition of ―manufacture‖ from section 10B was not to provide a restricted meaning for that term contained in the main section because if that was so, then the Legislature would have only modified the definition clause. Further, the definition of 100 per cent export oriented unit even after the amendment is retained in the said section, which defines it as an undertaking which has been approved as a 100 per cent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of powers conferred by section 40 of the Industries (Development & Regulation) Act, 1951, and the Rules made under that Act. It is pertinent to note the products for which the assessee's unit is recognized as a 100 per cent export oriented unit are tea bags, tea in packets and tea in bulk packs. In fact, the assessee is exclusively engaged in blending and packing of tea for export and is not manufacturing or producing any other article or thing. Still it is recognized as a 100 per cent export oriented unit by the concerned authority within the meaning of that term contained in the definition clause of section 10B of the Income-tax Act and the Department has no case that the assessee's unit engaged in export of tea bags and tea packets is not a 100 per cent export oriented unit. So much so, in our view, if exemption is denied on the ground that products exported are not produced or manufactured in the industrial unit of the assessee's 100 per cent export oriented unit, the same would defeat the very object of section 10B. Further, industrial units engaged in the very same activity, i.e., blending, packing and export of tea in the special economic zones and free trade zones, will continue to enjoy tax exemption under section 10A and section 10AA respectively. The still worse position is that the appellant would be denied of export exemption available under section 80HHC even to a merchant exporter. In our view, the decision of the Supreme Court in Tara Agencies' case [2007] 292 ITR 444 (SC) is not applicable for the purpose of considering exemption for industries in the export 140 ITA No. 72&85/PNJ/2012 processing zones, free trade zones and to 100 per cent export oriented units covered by sections 10A, 10AA and 10B of the Income-tax Act.
Therefore, following the judgment of this court above referred to we hold that the assessee is entitled to exemption on the profit derived by its 100 per cent export oriented unit engaged in blending, packing and export of tea bags and tea packets. Consequently, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders of the first appellate authority declaring the appellant's entitlement for exemption.‖ 43.12 Hon‟ble high court in this case, in our opinion, has clearly laid down that once the assessee is recognized as a 100% EOU for engaging in an activity and assessee is engaged in the same very activity, if the exemption is denied to the assessee on the ground that there is no production or manufacturing but only processing of the products exported in the 100% export oriented unit, the same would defeat the very object of section 10B. The Hon‟ble high court took the view that the decision of the Hon‟ble Supreme Court in Tara Agency‟s case 292 ITR 444 will not apply even though Hon‟ble Supreme Court in that case has held that blending of tea does not amount to manufacture or production of an article but is only processing. Thus, the Hon‟ble Kerala high court in the case of Tata Tea Ltd. (supra) gave the clear cut finding impliedly that even if the assessee is engaged in processing and is recognized as 100% EOU, it will be entitled for exemption claimed u/s 10B of the Act.
43.13 The crux of the submissions of the Ld. special Counsel for the department is that the assessee is engaged in these 100% export oriented units only in processing of iron ore and by processing it get it upgraded for export, therefore it is not entitled for exemption u/s 10B does not have any leg to stand in view of the decision of Kerala High Court (supra), Supreme Court in the case of Chowgule & Co(supra). Even on this issue we have gone through the decision of Hon‟ble Special Bench in the case of Madhu Jayanti International Ltd. and Others Vs. DCIT. The question for consideration and decision of the Special Bench was:
―Whether on the facts and in the circumstances of the case, the Assessees, who are in the business of blending & processing of tea and export thereof, can be said to be ―Manufacture/Producer‖ of the tea for the purpose of Section 10A/10B of the I.T. Act, 1961?‖ 141 ITA No. 72&85/PNJ/2012
44. The brief facts in the case of Madhu Jayanti International Ltd. in ITA No. 1463/Kol/2007 were that the assessee was engaged in the business of manufacturing, processing, exporting and dealing in various commodities, more particularly tea, coffee, jute, pepper, chillies, cardamom, turmeric and similar other spices, etc. The assessee, as per the claim is a 100% EOU within the meaning of section 10B of the I.T. Act, 1961 and claimed exemption under that section. The assessee buys tea from auctions held in Tea Board recognized Auction centres at Kolkata, Guwahati, Siliguri, Cochin, Coimbatore and Coonoor. The assessee conceded the factual position that it imports small quantity of tea of the type and quality not produced in India. It further conceded the factual position that it does not grow or manufacture any tea. According to the assessee, tea so bought in different auctions is processed with a view to remove all dust and foreign substances and thereafter it blends different varieties of tea to make it of „uniform and consistent‟ quality throughout the year. Thereafter, it is packed in consumer packets of 50, 100, 250, 500 or 1000 gms. Etc. or packed in the form of tea bags of 1.94 gms. Or 2 gms. etc., as the case may be. The assessee claimed exemption u/s 10B of the Act in respect of its 100% EOU for export of manufactured jute bags, packet tea, tea bags, bulk tea, etc. The AO rejected the claim of assessee of exemption u/s 10B in respect of export of blending of tea. The rejection of exemption u/s 10B was confirmed by the CIT(A). When the matter went before the special Bench, Special Bench after discussion the relevant provisions as well as the various decisions of High Court and the Supreme Court held as under:-
"32. The provisions of section 10AA of the Act was inserted on the statute book by the Special Economic Zones Act, 2005 w.e.f. 10.02.2006. Even prior to the enactment of the said SEZ Act, Special Economic Zones (including units therein) were all along treated like EQU / FTZ / EPZ for all purposes whatsoever and were dealt within the Exim Policy accordingly. Section 2(k) of the Special Economic Zone Act, 2005 defines the expression "Existing Special Economic Zone" to mean every Special Economic Zone which is in existence on or before the commencement of the said Act. Section 2(e) defines the expression "existing unit" to mean every unit which has been set up on or before the commencement of the said Act in an existing Special Economic Zone. In other words, admittedly all Special Economic Zones were also being governed by the Exim Policy prior to the enactment of SEZ Act, 2005. Clause (iii) of Explanation 1 to section 1OAA lays down that the expression "manufacture" shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, which definition is as under:142
ITA No. 72&85/PNJ/2012 "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by 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 husbandly, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining".
In Exim Policy, the expression "manufacture" is defined, in paragraph 9.30 & 9.31 thereof almost in the same manner as in the Special Economic Zone Act, 2005, which is as under:
"Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, repacking, polishing and labeling. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining."
But the only difference between the Exim Policy of 2002-07 and of 2000 is that words "and segregation" which were appearing in the definition of the expression 'manufacture" in the Exim policy of 2000 was deleted in the Exim Policy of 2002-07. Further, even in Prevention of Food Alternation Rules, 1955, it has been inter alia stated that ―Tea used in the manufacture of flavoured tea shall conform to the standards of tea. The flavoured tea:manufacturers shall register themselves with the Tea Board before making flavour tea In The Tea (Distribution & Export) Control Order, 1957 issued by the Government of India, Ministry of Commerce & Industry (Department of Commerce) the expressions "flavour tea", "green tea" "instant tea", "packet tea" "quick brewing black tea", "tea" and "test bag" have been separately defined as distinct product. In Tea (Marketing) Control Order, 2003 issued by the ' Central Government, in exercise of the powers conferred by section 30(5)(3) of The Tea Act, 1953, the expressions "manufacturer", "Buyer", "Packet Tea", "Tea Bag",-"Green Tea", "Quick Brewing Black Tea", "Instant Tea" and "Made Tea" have also been distinctly and separately defined. Clause (29BA) was inserted in section 2 of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 w.e.f. 01.04.2009 to define the expression "manufacture" as under:
"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; The aforesaid definition of the expression "manufacture", although brought into the statute book w.e.f. 01.04.2009, was applied by the Hon'ble Supreme Court even for the assessment year 2001-02 in ITO v. Arihant Tiles and Marbles Pvt. Ltd. (2010) 320 ITR 79, 82 (SC) on the 143 ITA No. 72&85/PNJ/2012 ground that Parliament had taken note of ground reality in inserting section 2(29BA) in the Income Tax Law. The said definition was again applied by the Hon'ble Supreme Court in CIT V. Emptee Poly-Yarn Pvt. Ltd. (2010) "Green Tea" means the variety of manufactured tea commercially known as green tea; 320 ITR 665,667 (SC).
33. The Assessee Company carries out its operations of blending, packaging and export of tea bags, tea packets and bulk tea packs in its modern factory, well equipped with all imported and sophisticated automatic plant and machineries with the help of over 100 workmen engaged on contract basis through M/s. Trot Pvt. Ltd. The manufacturing'. operations are carried in its said factory situated at 19/4A, Munshiganj Road (under Falta Export Processing Zone), Kolkata. We find from facts of the case that the details of turnover of the assessee shows Bulk Tea (0.94%), Packet Tea and Tea Bags .(99.06%),. as. per different descriptions, brand names and varieties, as listed APR. Assessee Company is duly registered as a 100% EOU by the Government of India, Ministry of Industry, Department of industrial Policy and Promotion Secretarial for Industrial Approvals, ECU Section in the state of West Bengal for manufacture of Packet Tea, Tea Bags/Bulk Tea with annual capacity of 3110 Mt. in terms of Registration Certificate dated 26th December, 1995, inter alia, with the condition that its 100% production (excluding rejects not exceeding 5%) would have to be exported and that its registered EOU Unit shall make value addition to a minimum extent of 79%. Undisputedly, the exported consumer products, blended by Assessee in its said factory premises is a case of substantial value addition, as compared to the unblended black tea in granule and dust form normally available for sale in the open retail market throughout India.
34. The subject for consideration under sections 10A and/or 10B of the said Act is manufacture / production of tea ; the object being grant of benefits of tax exemption to exporters carrying out their operations in FTZ, EOU, EPZ & SEZ areas in accordance with the Exim Policy declared by the Government of India in Parliament and in the light of allied and governing laws; in the light of allied laws e.g. The Tea Act, 1953, The Prevention of Food Adulteration Act, 1953 read with Prevention of Food Adulteration Rules, 1955. The Tea (Marketing) Control Order, 2003, The Tea (Distribution & Export) Control Order, 2005 as well as the Rules and Regulations framed by the Tea Board and also Calcutta Tea Traders Association from time to time as discussed above.
35. We find from the above facts and circumstances and case laws relied on by both the sides that the assessee was exclusively engaged in blending, packaging and export of tea bags, tea packets and bulk tea packs. The assessee's division enjoys recognition as a 100% EOU, which is granted by the Development Commissioner, Ministry of Commerce & Industry, Govt. of India. The assessee claimed exemption u/s. 10B of the Act for AYs 2000-01 onwards, which was granted upto the AY 2003-
04. However, for the AY 2004-05, exemption was declined for the reasons that by the Finance Act, 2000, the definition of `manufacture' which included 'processing' contained in section 1OB of the Act was deleted w.e.f. 01.04.2001. The argument of the department is that manufacture or production had liberal meaning under the definition clause contained 144 ITA No. 72&85/PNJ/2012 in section 10B of the Act until its deletion which covers even processing and, therefore, blending "and packaging of tea for export was treated as 'manufacture' or 'production' of an article qualifying for exemption. We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. TOA of the Act and units in the free trade zone provided u/s, 10AA of the Act and the exemption available to 100% EOU u/s. 1OB of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature is correct. We find that Hon'ble Kerala High Court also considered the judgment in-the decision of Supreme Court in Tara Agencies, supra relied on by the Ld. CIT, DR, wherein Hon'ble Supreme Court clearly held that blending of tea does not amount to 'manufacture' or 'production' of an article, but is only processing. We find that the assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division and the Department had no case that the assessee's unit engaged in export of tea bags and tea packets was not a 100% EOU. If exemption was denied on the ground that products exported were not produced or manufactured in the industrial unit of the assessee's 100% EOU, it would defeat the very object of sections 10B of the Act.
36. We, in view of the above, hold that when the products for which the assessee's unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of Section 10A, 10AA and 10B, we have to consider the definition of the word "manufacture" as defined in Section 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order, 2003, etc. We also find that the definition of 'manufacture' as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term `manufacture' under the common parlance, and it includes processing, blending, packaging etc. In view of the above and respectfully following the decision of Hon'ble Kerala High Court in the case of Girnar Industries (supra) and Tata Tea Limited (supra), we "hold that the assessee is entitled for exemption under Section 10B of the Act on account of blending of tea. Similarly, in our view, the industrial units engaged in the very same activity i.e. blending, packing and export of tea in the free trade zone shall also be entitled to enjoy tax exemption under Section 10A of the Act.
37. Accordingly, we answer the question referred in favour of the assessee by holding that the assessees who are in the business of blending and processing of tea and export thereof, in 100% EOUs are manufacturer/ producer of the tea for the purpose of claiming exemption u/s.10B of the Act. Further, assessees who are in the business of blending and processing of tea hi respect of undertakings in free trade zones are 145 ITA No. 72&85/PNJ/2012 manufacturer/producer of tea for the purpose of claiming exemption u/s. 10A of the Act. We have examined and discussed the facts in the case of Madhu Jayanti International Ltd. and found that there is blending of tea and consequently the assessee is eligible for exemption u/s. 10B of the Act as prayed for. Their appeal for the AY 2004-05 is allowed. As regards other appeals and that of the interveners, the matters are restored back to the Division Bench, with directions to decide those appeals in the light of principle laid down herein, so far as the claim for relief u/s. 10A or 10B of the Act in accordance with law.‖ 44.1 From the reading of para 35 of the aforesaid judgment we noted that the Special Bench in this case clearly held that the assessee was engaged only in processing and was not engaged in the manufacture or production but had ultimately under para 36 it took the view in view of the fact that the definition of „manufacture‟ u/s 2(r) of the SEZ Act, 2005 which is incorporated in section 10AA w.e.f. 10/02/2006 includes „processing‟. Therefore, following the decision of Kerala High Court in the case of Girnar Industries and Tata Tea Ltd. (which was discussed by us in the preceding paragraphs) held that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea.
45. We have also gone through the decision of Hon'ble Supreme Court in Indian Cine Agencies Vs CIT 308 ITR 98. In this case the question before the Hon‟ble Supreme Court was: When the assessee was engaged in the activity of cutting jumbo roll films into flat and small rolls in desired sizes, whether such activity undertaken by the assessee was manufacture or production? In this case, the Hon‟ble Supreme Court after discussing various cases, the provisions of different Acts and the dictionary meaning took the view that the assessee was engaged in manufacture / production. While holding so under para 12 of its order, Hon‟ble Supreme Court has given the same analogy for the purpose of eligibility of deduction under section 80HH and 80-I as has been given by the Kerala High Court in the case of Tata Tea discussed herein above for the purpose of section 10B, that if there was no manufacturing activity, then the question of referring to item 10 of Eleventh Schedule for the purpose of exclusion does not arise. From this judgment, thus, it is apparent that the Hon‟ble Apex Court accepted that manufacture/production includes processing also.
146ITA No. 72&85/PNJ/2012 45.1 We have also gone through the decision of Hon‟ble Supreme Court in the case of ITO Vs. Arihant Tiles and Marbles Pvt. Ltd. 320 ITR 79(sc). In this case when the assessee was engaged in the activity of cutting and polishing of marble blocks, the question before the Supreme Court was whether the activities undertaken by the assessee would fall within the meaning of the words „manufacture or production‟ in section 80-IA of the Income-tax Act, 1961? In this case, Hon‟ble Supreme Court, after discussing the definition of „manufacture‟ given in section 2(29BA) of the Income-tax Act, 1961 and also discussing the provisions of section 80-IA(2)(iii) and after going through various decisions, held as under:
"22. Applying the above tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961.
23. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961.‖ 45.2 In this case also, Hon‟ble Supreme Court took the view that cutting and polishing of the marble blocks is the activity which constitutes „manufacture or production‟ as after processing marble block no more remains as marble 147 ITA No. 72&85/PNJ/2012 block. This decision has also duly considered, in our opinion, whether the activity of processing is manufacture / production.
45.3 Now, we would like to deal with the submissions of the revenue whether this issue should be sent to Special Bench or not. We have gone through the decision of this Tribunal in ITA No. 162/PNJ/2006 dt. 12 th July, 2007 read with Misc. Application in MA No. 23/PNJ/2007 dt. 19th July, 2007 in the case of Chowgule & Co. In this case we noted that the coordinate Bench of the Tribunal has interpreted the decision of the Hon‟ble Supreme Court in the case of Sesa Goa 271 ITR 331 that extraction and processing of mining ore amounts to production; and one should read the expression „extraction and processing‟ together (this decision was not rendered in respect of exemption available u/s 10B). Even the coordinate bench of this Tribunal further held that ―if section 10B provides exemption for processing also, the law would have made it very clear by apparently stating that processing is also entitled for exemption. When the expression ‗processing' is omitted in section 10B, we are not supposed to fill up the omission. If something is not there we should accept as it is not there. We should not provide for the omission that amounts to judicial legislation. There is no confusion in the provision of law provided under section 10B. The exemption is available only to manufacture or production. It is not available for processing.‖ Although subsequently this Tribunal has rectified the order under section 254 vide order dated 19th July, 2007 on the application of the assessee and took the view that the assessee is entitled for exemption under section 10B as the assessee-company itself is extracting the entire iron ore from own mines and mines taken on lease and thereafter processing the same. We cannot look into the finding of the coordinate Bench whether they have correctly interpreted the decision of Supreme Court in 271 ITR 331 or not. The Ld. AR vehemently contended that the decision dt. 12th July, 2007 of this Tribunal in that case got overruled by the decision of this Tribunal vide order dt. 19 th July, 2007 but we do not agree on this with the Ld. AR. We have gone through the order dt. 12th July, 2007 as well as order dt. 19th July, 2007 but we noted that the Tribunal rectified the order as the Tribunal noted the assessee itself was extracting the entire ores and processing the same. Thus, the assessee complied with both the conditions of extracting and processing of iron ore. This Tribunal did not reverse the finding that the processing is not entitled for 148 ITA No. 72&85/PNJ/2012 the exemption. The Tribunal did not reverse the finding that extraction and processing should go together. Even that bench / tribunal did not visualize that 100% EOU is approved for a particular location and its boundry cannot extend beyond that location. It is only the profit derived by the 100% EOU Unit situated within that location, can be regarded to be the profit derived by the 100% EOU. The assessee in that case has taken the mines on lease which were not approved as part of 100% EOU but still the assessee was allowed exemption u/s 10B even though the iron ore extracted from those mines which were taken on lease were not part of the 100% EOU 45.4 No doubt the decision of the coordinate Bench is binding on us in view of the settled judicial principles in the various decisions even relied on by the Ld. CCIT but there are certain exceptions to this cardinal principle of judicial discipline. Once the decision of Special Bench or Third Member has come on similar issue subsequently, the decision of the Special Bench will be binding on us. If the decision of jurisdictional high court / supreme court has come subsequently on the similar issue, in view of the Article 141 of the Constitution of India that decision will be binding on us. Even this will be regarded a mistake of law in view of the decision of Hon‟ble Supreme Court in the case of CIT vs Saurashtra Kutch Stock Exchange 305 ITR 227 (SC).If there is no jurisdictional high court decision and subsequently any other high court has decided the similar issue, this is the settled principle of law that the decision of that high court has to be followed as the high court is always superior to the tribunal in preference to the decision of coordinate bench. The decision so pronounced subsequently if affects the issue relating to the assessee, in our opinion, these subsequent decisions are binding on us as judicial discipline require that. This Tribunal is bound to consider those decisions and the Tribunal is not bound with the decision of the coordinate Bench. The jurisdictional Bombay High Court in the case of H.A. Shah & Co. Vs. CIT (1956) 30 ITR 618, 625 (Bom.) even took the view that in case fresh material facts came to the knowledge of subsequent bench, the decision of coordinate bench is not binding. In this regard, Hon‟ble High Court observed as under :-
―Nor are we satisfied that in order to enable the second Tribunal to depart from the finding of the first Tribunal it is essential that there must be some fresh facts which must be placed before the second 149 ITA No. 72&85/PNJ/2012 Tribunal which were not placed before the first Tribunal. If the first Tribunal failed to take into consideration material facts, facts which had a considerable bearing upon the ultimate decision, and if the second Tribunal was satisfied that the decision was arrived at because of the failure to take into consideration those material facts and that if these material facts had been taken into consideration the decision would have been different, then the second Tribunal would be in the same position to revise the earlier decision as if fresh facts had been placed before it. On principle there is not much difference between fresh facts being placed before the second Tribunal and the second Tribunal taking into consideration certain material facts which the first Tribunal failed to take into consideration‖.
45.5 The other exception is for non-binding of the coordinate Bench decision is when there had been amendment in law subsequent to the decision on the basis of which the coordinate bench rendered the decision and the co-ordinate Bench could not be able to consider the said amendments, the decision of the co-ordinate Bench is not binding. From para 14 of the order of the Co-ordinate Bench it is apparently clear while deciding the appeal in the case of Chowgule & Co. (ITA 162 & 184), it had got impressed that the expression "processing" is omitted in Section 10B. The appeal relates to A.Y.2002-03 not relating to impugned A.Y. Clause (iii) of Explanation 1 to section 1OAA, which lays down that the expression "manufacture" shall have the same meaning as assigned to it in section 2(r) of the Special Economic Zones Act, 2005, and section 2(29BA) were subsequently brought into the statute after the rendering of the decision of Hon‟ble Supreme Court in the case of Sesa Goa 271 ITR on the basis of Co-ordinate bench decided the case of Chowgule & Co. Even these provisions were not in the statute during the assessment year 2002-03 to which year the co-ordinate bench was entrusted with the issue of claim of exemption u/s 10B. The co-ordinate bench could not have any occasion to consider the same even though the clause (iii) of explanation 1 to section 10AA has already come into force after the decision of Hon‟ble Apex court in the case of Sesa Goa Ltd 271 ITR 331 when the decisions was rendered but was not inserted with retrospective effect. Even the provision of Section 2(29BA) was also inserted after the decision of Hon‟ble Supreme Court in the case of Sesa Goa Ltd(supra). Both these amendments are in the statute as on today and are to be considered for the impugned assessment year. The decision of Supreme Court in the case of Chowgule & Co as cited by us earlier was also not considered by the 150 ITA No. 72&85/PNJ/2012 coordinate bench as the word "processing" was omitted in section 10B during that year for which case was decided. Both these amendments have duly been considered by the subsequent decision of Special Bench, High Court and the Supreme Court cited by us in discussion held here in above. We noted that subsequent to the decision of this Tribunal in ITA No. 162/PNJ/2006 dt. 12th July, 2007, the Special Bench of this Tribunal in the case of Madhu Jayanti International Ltd. [2012-TIOL-424-ITAT-KOL-SB] has dealt with the issue exhaustibly whether the assessees who are in the business of blending of tea i.e processing of tea and export thereof in 100% EOU can be said to be manufacturer / producer of tea for the purpose of section 10A/10B. When the Supreme Court has already held in the case of Tara Agencies 292 ITR 444 that blending of tea is processing. Thus, the Special Bench has decided the issue in respect of 100% EOU for the purpose of exemption under section 10B whether an assessee who is engaged in processing can be said to be engaged in manufacture / processing. We also noted that Kerala High Court in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 dealt with the issue in respect of 100% EOU for the purpose of exemption under section 10B whether the processing of tea is treated as manufacture or production of an article qualifying for exemption. Not only these decisions subsequent to the decision of the coordinate Bench, Supreme Court has also decided following cases in which also, in our opinion, similar issue whether processing is manufacture or production has been decided. These decisions are given as under:-
i) India Cine Agencies 308 ITR 98 (SC)
ii) Oracle Software India Ltd. 320 ITR 546 (SC)
iii) Arihant Tiles and Marbles (P) Ltd. 320 ITR 79 (SC).
45.6 We noted that in all these decisions except in the case of Oracle Software the decision of the Supreme Court in the case of CIT vs. Sesa Goa Ltd. 271 ITR 331 was referred to by the court. Hon‟ble Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. 286 ITR 1 (P&H) has observed as under on the responsibility of the Tribunal while deciding the case:
151ITA No. 72&85/PNJ/2012 ―The Tribunal being the last fact-finding authority, a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue. Every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court.‖ 45.7 We noted that the coordinate Bench in the case of Chowgule & Co.
Ltd. ITA No. 162/PNJ/2006 decided the issue only on the basis of the decision of the Supreme Court in the case of CIT Vs. Gem India Manufacturing Co. 249 ITR 307, while the said decision has not been followed by the Supreme Court in their subsequent decisions. Even the case relate to A.Y.2002-03. No contrary decision subsequent to the decision of the Special Bench, Kerala High Court and that of the Supreme Court rendered in the case of India Cine Agency (supra) as well as Arihant Tiles & Marbles (Supra) was brought to our knowledge which may have taken a different view that 100% EOU approved by the competent authority if engaged in processing activity for upgrading a commodity for the purpose of marketability for export would not be allowed exemption u/s 10B. The Ld. Special Counsel even could not bring to our knowledge any decision subsequent to the decision of the Special Bench and Arihant Tiles & Marbles (SC) as well as Kerala High Court in the case of Tata Tea (Supra) which would have disallowed the claim of the assessee u/s 10B on this basis after considering the Explanation (iii) of section 10AA as well as definition given u/s 2(29BA). Thus, due to the decision rendered by the Special Bench, High Courts and Supreme Court subsequent to the date of order in the case of Chowgule & Co. Ltd. Vs. ACIT in ITA No. 162/PNJ/2006 in our opinion, the issue raised by the Revenue is not fit to be referred to Special Bench as the decisions of Special Bench / High Court / Supreme Court are binding on us in preference to the decision of the coordinate Bench. Thus, we have in our opinion germane reason not to refer this issue for constitution of a Special Bench as in our opinion even if the Special Bench is constituted the earlier decision of the Special Bench in the case of Madhu Jayanti will be binding until and unless there are special and germane reasons for constituting a large Special 152 ITA No. 72&85/PNJ/2012 Bench. We, therefore, dismiss the application dt. 18/01/2013 moved by the Revenue for constituting the Special Bench.
45.8 Now coming back to the issue whether an assessee who is engaged in processing for upgrading and making the commodity fit for export and which is a 100% EOU approved by the competent authority can be said to have been engaged in manufacture or production of an article or thing. We have noted that this issue is duly covered by the decision of the Special Bench in the case of Madhu Jayanti International Ltd.(supra). The relevant paragraph of this judgement has been reproduced by us in the preceding paras.
45.9 In this decision, Special Bench has exhaustively dealt with the provisions of section 10B, section 2(29BA) of the Income-tax Act, 1961 and section 2(r) of the Special Economic Zones Act, 2005; and the various decisions of the Supreme Court as well as the High Court which dealt with the similar issue and even the decision of Chowgule & CO (SC) as was referred to by us in the preceding paras herein above. The Special Bench clearly noted in this decision, the decision of the Supreme Court in Tara Agencies‟ case 292 ITR 444 in which it was held blending and packing of tea amounts to processing and is not manufacturing or producing of an article or thing. In this decision the Special Bench also noted that Kerala High Court in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 (Ker.) which took the view that 100% EOU engaged in processing cannot be denied exemption on the basis that the units are not engaged in manufacture or production. Moreover, on facts exactly similar to the facts of the assessee, in the case of Chowgule & Co. Pvt. Ltd. Vs Union Of India (1981) 1 SCC 653 AIR 1981 SC 014, Hon‟ble Supreme Court were concerned with the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted „manufacture‟ or „processing‟ of ore for sale within the meaning of section 8(3)(b) and Rule 13 of Central Sales Tax Act, 1956. The Hon‟ble Supreme Court, in construing the expression "processing" allowed the appeal of the assessee, in Chowgule & Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its "development or preparation for the market" it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 153 ITA No. 72&85/PNJ/2012 1956. The Special Bench ultimately allowed exemption to the assessee on the similar issue where the assessee was engaged in the business of blending the tea for upgrading for marketing. Thus, in view of the decision of the Special Bench and other decisions discussed in the preceding paragraphs and that of Hon‟ble Supreme Court in the case of Chowgule & co (supra) as well as definition of „manufacture‟ as inserted w.e.f 1.4.2009 by way of section 2 (29AB) of the Income Tax Act as referred to by both the parties, we hold that all the three 100% EOU engaged in processing so as to make crude ore and waste i.e tailings usable or marketable are entitled for exemption u/s 10B subject to the other conditions for exemption under section 10B are being fulfilled.
45.10 Now, we will deal with the contention whether the assessee has set new units or has merely reconstructed the business which was already in existence. We noted that the assessee had made the following investments in installing the Plant & Machinery in these EOUs:-
Fin.Year Amona Chitradurga Codli 1999-2000 9,00,78,574 2002-03 3,96,10,020 2005-06 93,84,633 (Phase-I) 2006-07 35,67,257 (Phase-II) 2008-09 7,03,82,158 (Phase-III) Total: 3,96,10,020 8,33,34,046 (All Phs) 9,00,78,574
The contention of the assessee is that it had set up all these units as new units and had also got the approval for them from the competent authority as 100% EOU units. The old machinery and part of old machineries wherever used, the value of these machineries were less than 20% in each units. The old units situated in Amona, Chtradurga and Codli were eroded, non- productive and non-economical. The revenue has strongly contended that none of these units even though 100% EOU but were setup long ago. The assessee had merely renovated these units during the period as claimed by 154 ITA No. 72&85/PNJ/2012 the assessee. The revenue on the other hand accepted that the assessee had invested in Amona plant Rs.3,96,10,020/- during the year 2002-03 and in Chitradurga unit during F.Y. 2005-06 to 2008-09 Rs.8,33,34,046/- but the assessee had not submitted any evidence in respect of the investments made in the Codli unit and in which year. We noted that CIT(A) in his appellate order at page nos. 48-50 has given „Depreciation Charts‟ in respect of Plant & Machinery previously Used at Amona plant. Likewise, at page nos. 65-66 similar charts in respect of Chitradurga unit have been given. Column „Additions‟ has been left blank. These charts have been compiled by the CIT(A) or by the department. This gives an impression as if no addition to plant & machinery had been made during the financial years concerned in these plants by the assessee while we verified from page 45 to 58 of first PB that there are additions in the plant and machinery of the units. This fact is also verifiable from the minutes of the Board meeting and schedule of fixed assets forming part of the Balance sheet for the respective financial years, which were duly audited. The assessee produced the following documents in support of the fresh capital investment made by it in acquisition of plant & machinery for its EOUs in each relevant financial year:
i. Minutes of the meetings of Board of Directors of the appellant-company approving capital expenditure at Amona and Chitradurga Plants at page nos. 696, 699-700 & 702 of the paper book.
ii. Photographs of Pants at Amona & Chitradurga EOUs at page nos. 704-713 of the paper book.
iii. Year-wise Tables of Plant & Machinery capitalized for -
(a) Amona EOU for the FYs 2002-03 to 2008-09 (at page nos. 45-48 of the paper book),
(b) Chitradurga EOU for the FYs 2005-06 to 2008-09 (at page nos. 54-55 of the paper book), and
(c) Codli EOU for the FYs 1999-2000 to 2008-09 (at page nos. 38-40 of the paper book).
iv. Audited Annual Accounts of the appellant-company for the financial years ended on 31/03/2003, 31/03/2006, 31/03/2007 and 31/03/2009 at page nos. 91-632 of the Additional paper book.155
ITA No. 72&85/PNJ/2012 v. Copies of bills of plant & machinery items were submitted in respect of the EOUs as under:
(a) Amona EOU for Rs. 3,57,03,426/- out of total investment of Rs. 3,96,10,020/- at page nos. 794-1146 and 1378-1435 of the Additional paper books.
(b) Chitradura EOU for Rs. 8,18,50,910/- out of total investment of Rs. 8,33,34,046/- at page nos. 1147-1355 and 1436-1472 of the Additional paper books.
45.11 These evidences clearly prove, in our opinion, that the assessee made huge investments in these units. Even the assessee submitted the evidences for selling the old and obsolete dismantled machines as scrap sales. We do agree that the assessee had not reduced the block of assets with these amounts but this in our opinion will not change the true character of the transaction. We find force in the submission of the assessee that in the case of Amona EOU, old unit set-up in 1985 had become outdated, obsolete, even dangerous and uneconomical to run after a span of 17 years. Therefore, the assessee had to take an immediate action to either abandon it or revamp it entirely. This fact is also proved with the fact that the production capacity of this plant which was 1 MTPA earlier got doubled at 2 MTPA coupled with further flexibility created to increase it more in future after setting up new unit. The newly increased production capacity had not been denied by the revenue. The cost of new plant and machinery for all major / critical processes and civil structures for those plants amounted to Rs. 3,96,10,020/- during the FY 2002-03, whereas the WDV of the old plant used in the new undertaking was just Rs. 26,17,714/-, which is a mere 6.7% of the cost of new plant & machinery, i.e., within the permissible limit of 20%. The CIT(A), in our opinion, was not correct in comparing the number of machines and equipments installed in mining division to be part of old plant and machinery installed in 100% EOU Units when in fact mining division is not part of 100% EOU as per the application made by the assessee and the approval allowed by the competent authorities to ascertain whether substantial expansion had taken place in the FY 2002-03 at Amona plant or not. Similarly, we find force in the submissions of the Ld. AR in the absence of any contrary evidence that the present unit in Chitradurga, Karnataka was initially set-up and run by a company called M/s A. Narrain Mines Ltd. The said company was acquired by the assessee-company in the FY 1998-99 and it was later merged into the 156 ITA No. 72&85/PNJ/2012 assessee-company. The existing plant in the said unit was quite old and had become inefficient due to the completion of its economic life. The assessee undertook a project to set up a new undertaking during the FY 2005-06 in a phased manner to increase the capacity by employing latest technology/facility in place of existing production facility. The assessee applied to the Karnataka State Pollution Control Board vide its application dated 09/09/2005 for its Consent for Establishment under the Water and Air Acts for expansion of iron ore mining capacity from 1.6 MTPA to 2.5 MTPA. Subsequently, the management of the company also underwent a change from Mitsui group with M/s Vedanta Group. Due to this expansion/establishment project could be completed during the FY 2008-09 in three phases having a total production capacity of 6 MTPA. The investments were made in a phased manner which resulted in creation of new unit in place of the existing unit. In the FY 2005-06, i.e., the initial year for the purpose of section 10B, total investment of Rs. 93,84,633/- was made in acquisition of new plant & machinery including dismantling of the old plant & structures. The phase-II of project establishment was completed next year, i.e., FY 2006-07 in which fresh capital investment of Rs. 35,67,257/- was made in plant & machinery. Finally the third phase of new plant was completed in the FY 2008-09 with an addition of Rs.7,03,82,158/- to plant & machinery. The WDV as on 01/04/2005 of the plant & machinery at Chitradurga was just Rs.6,93,596/- which was either dismantled completely or wherever structural steel was usable it was utilized in the erection of new machinery. The cost of new machinery acquired in FY 2005-06 was Rs. 93,84,633/-. Thus, the value of plant & machinery existing as on 01/04/2005 was merely 7.4% of the cost of new plant & machinery; which is also within the permissible limit. The accounts books in that year were duly audited and were not rejected by the Assessing officer in those assessment years. Now coming to Codli UFR unit, we noted that neither the assessing officer nor the CIT (Appeals) has disputed the capital investment made in new plant & machinery in the FY 1999-2000, they have merely expressed their dissatisfaction on the evidences furnished by the assessee in respect of the date of commencement of manufacturing or production, which was stated as 08/03/2000 by the assessee on the strength of documentary evidences such as the Approval from the Board of Approvals, intimation of commencement of 157 ITA No. 72&85/PNJ/2012 commercial production on 08/03/2000 to the Ministry of Industries, etc., which have discussed separately in this order by us. The main contentions of the revenue before us are as under:-
(i) That all old machines were not replaced since there was no deletion in the book value of the existing plant shown in the depreciation charts for the concerned years.
(ii) That by carrying out repairs a new unit is not set-up. In the case of Chitradurga unit, some bills were found for undertaking fabrication, erection and other such works which appear to be revenue in nature and not capital in nature.
(iii) That in the case of Amona plant, correspondence with Village Panchayat shows that the construction activities were actually in the nature of repairs and renovation.
(iv) That the assessee had incorrectly claimed that the entire existing plant at Chitradurga was demolished in the FY 2005-06 itself, whereas only one bill of Rs. 3,522/- contained demolition or dismantling charges.
(v) That for determining the percentage of old equipment used in the new unit, even the assets held at the Extraction units must be taken into consideration.
(vi) That year-wise production data of Chitradurga unit shows that the production increased without new investment in plant & machinery. Moreover, no major plant & machinery was installed at Chitradurga as could help in increasing the production capacity.
45.12 According to Revenue, all old machines were not replaced since there was no deletion in the book value of the existing plant shown in the depreciation charts for the concerned years. CIT(A) has complied charts in respect of Amona and Chitradurga units in his appellate order. In this regard the Ld. AR explained the basic cost of plant & machinery in the case of an iron ore beneficiation plant is incurred on raising steel and concrete structures on which the conveyor belts, crushers, screens, etc. are installed. Though all existing items of machine were scrapped usable steel from the same was utilized in the erection of new machines and equipments for which only some additional charges were paid. Thus, the existing dismantled structure got merged within the new plant to that extent. Accordingly, instead of deleting 158 ITA No. 72&85/PNJ/2012 the relatable value of existing plant, the cost of additional plant acquired during the year was recorded at net value. Also the scrap of the remaining existing plant was sold and shown separately in the relevant audited profit & loss account for the concerned financial year under the head "Service and Other Proceeds" for which attention was drawn to P & L account and accordingly these meager sums were not reduced from the schedule of fixed assets. In this regard, our attention was drawn to Schedule 14 of the profit & loss account for the years ended on 31/03/2003 and 31/03/2006 and also the break-up of "Service and Other Proceeds" provided at page nos. 1356 and 1365 of the paper book for the said two financial years respectively. Gross receipt from sale of scrap for Goa (Amona unit) amounting to Rs. 71,41,971/- was declared in the FY 2002-03; and that of Rs. 4,67,163/- was declared for the year ended on 31/03/2006 in respect of Karnataka (Chitradurga unit). We find substance in the explanation of the Ld. AR that the said contention of the Revenue does not, therefore, hold good in our opinion. Otherwise also, we have noted that the value of the existing plant was much below the threshold limit of 20% required for substantial investment for setting-up of a new unit for the purpose of section 10B.
45.13 With regard to the contention of the Revenue that in the case of Chitradurga unit, some bills were found for undertaking fabrication, erection and other such works which appear to be revenue in nature and not capital in nature. We noted the explanation of the Ld. AR that the assessments for the AYs 2006-07 and 2007-08 had been framed u/s 143(3) where depreciation vis-à-vis capital expenditure (fixed assets) had duly been examined by the AOs and even some disallowances had been made in respect of depreciation on assets other than plant & machinery, which was not disturbed, hence, accepted as correct by the AOs. The copies of the said assessment orders were furnished. Thus, when the factum of capital investment in plant & machinery in those years stood accepted by the department, it is beyond the jurisdiction of the first appellate authority to travel back to the completed assessments and hold otherwise. Moreover, these bills support the explanation of the assessee that it had paid fabrication and other such charges for reusing the existing steel and concrete structures wherever possible in the process of erecting its new plants. We find no fault with the 159 ITA No. 72&85/PNJ/2012 explanation of the Ld. AR and therefore do not agree on this with the authorities below.
45.14 We have examined the contention of the Revenue that in the case of Amona plant, correspondence with Village Panchayat shows that the construction activities were actually in the nature of repairs and renovation. The CIT(A) had referred to only a few correspondence exchanged with Panchayat to make a case that it was only some repairs or at best a renovation work undertaken at Amona, whereas several other pieces of correspondence were ignored by him which prove that the appellant had factually undertaken a major dismantling and demolition of the existing plant as well as erection and installation of new plant in its place there. From the correspondence exchanged with panchayat and newspaper clippings filed in PB (Pages 293,294,299 & 409-411), we noted the CIT(A) ignored the local newspaper clippings which in our opinion are vital piece of evidence in this regard. These clippings clearly bring out the fact that a complete destruction of old unit was done and altogether new plant was set-up at Amona, albeit, with the aid of some old machinery and parts thereof. Regarding the contention of the revenue that there is only one bill of Rs.3,522/- which contains demolition or dismantling charges, we noted that in the same bill Rs. 65,346/- and Rs. 79,060/- at sl. nos. 13 & 14 for dismantling of structural steel and crusher hopper respectively were also stated (page nos. 1443-1445 of the Additional paper book Vol.III). In the case of the assessee we noted and as has been accepted by the revenue itself that the extraction division and EOU units are entirely different, and the dispute before us relate only to the EOU units whether they are new or not, therefore in our view, revenue is not correct in adding the value of the extraction division for determining 20% threshold limit of old plant and machinery for establishing the new unit. On the one side, the revenue is taking the contention that extraction division is not the part of 100% EOU, therefore the assessee‟s EOU units cannot be regarded to have been engaged in extraction of ore and iron ore processing, on the other hand, while determining the threshold limit of 20% of old plant and machinery, the revenue cannot be permitted to take a contrary contention. We are of the firm view that while determining the eligibility of a particular unit u/s 10B, its only the value of old plant and machinery installed in that very unit will be considered for determining the threshold limit of 20%.
160ITA No. 72&85/PNJ/2012 Thus, this contention of the revenue stand dismissed. Production date submitted by the assessee on record clearly prove that the production in each of these units got substantially increased as compared to the production in the old units dismantled or discarded. There is no cogent evidence or material being brought on record by the revenue which may prove that the old unit remains in existence merely by reconstituting the same.
45.15 We have gone through the various cases relied on before us. These cases laid down as under:-
(i) CIT Vs. Mahaan Foods Ltd. (2009) 177 Taxman 274 (Del) : (2008) 216 CTR (Del) 148:
―12. As per findings of fact recorded by the Tribunal, it has been stated that in the present case the old undertaking no longer existed and remained identifiable. It was completely submerged in the new industrial undertaking of the assessee. The provisions of Section 80IA of the Act with reference to Explanation 2 do not require that new industrial undertaking should be raised on separate plot of land leaving the earlier undertaking totally untouched. We find that the processes for which the assessee entered into technological collaborations with M/s Rotacom Industries, B.V., Netherlands and M/s Seppo Ralli OY, Finland were the key processes of the assessee's industrial undertaking and other processes such as storage of milk in stainless steel storage tanks, pre-warming, pre-heating, pasteurization were only of preparatory nature for the manufacturing of the product of the assessee. The assessee appears to have introduced almost entirely new manufacturing technology and processes.
13. The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be set to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a 'business already in existence'. There must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alteration and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. (See CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662 [Bom.]
14. From the perusal of Section 80-IA of the Act it is clear that the statute itself has envisaged and approved of a situation in which an old existing smaller industrial undertaking is absorbed by a new much bigger industrial undertaking.
161ITA No. 72&85/PNJ/2012
15. In the present case, only capacity was increased and there was expansion of old business with some modifications. As for reconstruction of the business, it is nowhere evident that the old industrial unit was split up or damaged or destroyed that was supposedly reconstructed as a new unit by the assessee. What the assessee has done is to set up an industrial undertaking with latest technology and with increased capacity and of course, with a fairly good amount of fresh investment.‖
(ii) Mettur Chemicals & Industrial Corporation Ltd. Vs. CIT (1996) 217 ITR 768 (SC) ―11. It is found as a fact that the appellant had begun to manufacture or produce articles in the previous year ended on 31-3-1957 with the help of thirty hooker cells. It is true that rectifier had not been installed in the year 1957-58 but it is not in dispute that with suitable adjustment being made to the power system, the thirty hooker cells which had been installed were utilised. The use of these new hooker cells had resulted in the capacity of the unit gradually increasing and the production so made was not experimental but was commercial. This being so, the appellant's undertaking must be regarded as having been newly established when it had begun to manufacture or produce articles by 31-3-1957. As 1957-58 was the first assessment year...
13. This is a case where the manufacturing capacity of the appellant was increased on a licence being granted from 13.5 tons per day to 20 tons per day. In other words, these hooker cells were installed and the billeter cells were gradually replaced. The new industrial undertaking came into existence when the initial lot of thirty hooker cells were installed in the year 1957-58 which had resulted in enhanced commercial production. The Tribunal and the High Court, in our opinion, rightly came to the conclusion that the undertaking could function with thirty hooker cells in the year 1957-58 and further numbers were added in the subsequent year. The undertaking having thus started, the commercial manufacture in the year 1957-58 could not claim the benefit of provisions of Section 84 of the Act because the unit as such had commenced in the year 1957-58 notwithstanding the fact that there had been an expansion thereto in the subsequent year.‖
(iii) Taurus Merchandising (P) Ltd. Vs. ITO (2012) 143 TTJ (Del) 1 ―16. ...In Jt. CIT vs. Associated Capsules (P) Ltd. (2008) 117 TTJ (Mumbai) 399 : (2008) 9 DTR (Mumbai)(Trib) 95 : (2008) 304 ITR 85 (Mumbai)(AT), it has been held that where the assessee had established new plant and machinery at the same premises and was producing the same product as that done by the existing business, the new units were having separate and distinct identity of their own, profits and gains were derived from them and the assessee was treating each unit as a separate and independent unit in its accounts, the new units could not be held to be part of the existing business; and that the assessee was entitled to deduction under ss. 80-I and 80-IA of the Act.
17. Further, the existence of business is a presupposition for the formation of a new undertaking by the reconstruction or the splitting up 162 ITA No. 72&85/PNJ/2012 thereof. In the present case, there had been no business in the old unit of the assessee for over five years before the start of production by the new EOU. That being so, the new EOU of the assessee cannot, in any manner, be said to be formed by the reconstruction or splitting up of a business already in existence. Then, the authorities below have observed that mere registration as a one hundred per cent EOU is not the sole criterion for grant of deduction under s. 10B of the Act. This observation itself amounts to an admission of the unit being registered as a one hundred per cent unit with the Development Commr., NEPZ. Explanation 2(iv) to s. 10B of the Act provides for a one hundred per cent EOU to mean an undertaking which has been approved as a one hundred per cent EOU by the board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 and the Rules made thereunder. For facility, the said Expln. 2(iv) to s. 10B is being reproduced as follows:-
"Hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the Rules made under that Act."
18. Therefore, registration as a one hundred per cent EOU is a sine qua non for claiming deduction under s. 10B of the Act. Further, as is available from the copy of registration of the unit as a one hundred per cent EOU (assessee's paper book 71 to 74), the unit was duly approved by the Board appointed in this behalf by the Central Government. In Tube Investments of India Ltd. vs. Asstt. CIT (2009) 121 TTJ (Chennai)(TM) 577 : (2009) 20 DTR (Chennai)(TM)(Trib) 244 : (2009) 117 ITD 239 (Chennai)(TM), it has been held that a one hundred per cent EOU, as per Expln. 2(iv) to s. 10B means an undertaking approved as a one hundred per cent EOU by the board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 and the Rules framed under that Act; and that it was not the case of the Department that approval as required under the statute had not been accorded to the assessee...‖
(iv) Gujarat Alkalies and Chemicals Ltd. Vs. CIT (2012) 249 CTR (Guj.) 82 ―In the present case also, it is not the case of the Revenue that the new unit by itself is not capable of production of goods but the case of the Revenue is that it takes help of the old existing unit. We are of the view that, that itself should not be the reason to reject the claim under Section 80-I of the Act. Thus, whether an undertaking is a ―new industrial undertaking‖ entitled to the exemption under Section 80-I of the Act depends on the facts of each case. No hard and fast rule can be laid down. Use by the assessee of the old undertaking for the purpose of production in its new undertaking is not a decisive test in construing Section 80-I of the Act. The new undertaking must not be substantially the same old business. Substantial investment of new 163 ITA No. 72&85/PNJ/2012 capital is imperative and in the present case, there has been a huge substantial investment of around Rs.7 crore almost three decades ago. The words ―the capital employed‖ in the principal clause of Section 80-I of the Act are significant, for fresh capital must be employed in the new undertaking claiming exemption. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is essential to earn the benefit of Section 80- I. The fact that an assessee by establishment of a new industrial undertaking expands his existing business which he certainly does, would not on that score deprive him of the benefit under Section 80-I. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is a new identifiable endeavour where substantial investment of fresh capital is made to enable earning of profit attributable to that new capital.
In the circumstances, the question referred for the opinion of this Court is answered in the negative, i.e., against the Revenue and in favour of the assessee...‖
(v) Bajaj Tempo Ltd. Vs. CIT (1992) 104 CTR (SC) 116 Deduction under s. 15C of 1922 Act (s. 80J of 1961 Act) -- Allowability
-- Industrial undertaking established in a building taken on lease used previously for other purpose -- Tools and implements worth Rs. 3,500 of the previous undertaking also transferred -- Relief under s. 15C is allowable -- Clause (i) of sub-s. (2) of s. 15C does not apply -- The provision granting relief was enacted to encourage industrialization and has to be construed liberally -- Tools and implements transferred were of insignificant value as compared to the whole assets and literal construction of cl. (i) of s. 15C(2) would defeat the very purpose of enacting the provisions -- The key to interpretation is that the new undertaking should not be ‗formed' by transfer of building, plant or machinery -- Emphasis is on formation not on use.
45.16 We find that the following guiding principles emerge for the reckoning of a new unit based upon various land mark rulings and also find that -
(i) There was infusion of new capital by the assessee in those units.
(ii) There was substantial modification in the old units so as not to disturb the identity of the old units, i.e., the identity of those units remained unchanged.
(iii) There was least possible or insignificant usage of the plant and machinery of the old units.
(iv) There was a negative act of the assessee to disturb the identity of the old unit as the plant and machinery was dismantled by the assessee in all these units.
(v) The assessee had set up new units essentially producing the same commodity as in the existing units, though there is no such bar imposed in law.
164ITA No. 72&85/PNJ/2012 45.17 Accordingly, after hearing both the parties and also going through the material placed on record and after considering the various decisions, we hold that new units had actually been established by the assessee in the FY 1999-2000 at Codli; in the FY 2002-03 at Amona; and in the FY 2005-06 at Chitradurga.
45.18 We noted after going through the provisions of sec.10B that there is no requirement that the assessee should maintain separate books of accounts in respect of 100% EOU Unit for claiming deduction. The only requirement in this regard u/s 10B(5) is that the assessee shall not be allowed deduction unless the assessee furnishes in the prescribed form along with the return of income the report of an accountant, as we find in the explanation below sub- sec.2 of sec.288, certifying that deduction has been correctly claimed in accordance with provisions of the IT Act, 1961. We have gone through the case laws, as relied by the learned AR and we find that the case of the assessee is duly covered by the decision in the case of DCIT Vs Arabian Exports Ltd., (2007) 109 TTJ (Mum.) 440 on this issue. It is not denied by the revenue that the assessee has filed the report in accordance with sec.10B(5) of the IT Act, 1961. We therefore, dismiss this claim of the revenue.
45.19 We noted that in respect of the Amona plant the assessee has duly informed the DC, SEZ Bombay vide his letter dated 9.3.2008 i.e., commercial production started on 8.3.2000 and copy of the said letter was duly sent to Customs Department which was not disputed by these competent authorities.
45.20 In the case of Chitradurga plant also we noted that the assessee vide its letter dated 14.7.2008 duly intimated to the DC, SEZ that the converted 100% EOU is started commercial production on 6.6.2008. The premises of the said unit was bonded and the licence no.1/2008 dated 5.6.2008 was issued u/s 58 of the Customs Act. Similarly, we noted that in the case of Codli Unit the assessee has duly intimated to the Ministry of Industry vide letter dated 9.3.2000 that the commercial production is started on 8.3.2000. None of the aforesaid Government authority has disputed that the assessee has not started commercial production on that date.
165ITA No. 72&85/PNJ/2012 45.21 In view of the aforesaid discussion, we are of the view that the assessee is entitled for exemption u/s 10B in respect of all the three 100% Export Oriented Units, but during the course of the hearing, we noted that the assessee while computing the exemption u/s 10B has debited ore extracted from own mines in Amona unit as well as Chitradurga unit at cost of Rs. 45,25,23,692/- and Rs. 20,27,01,458/- respectively, while in view of provisions of section 10B(7) read with section 80-IA(8) the assessee is required to transfer the crude ore extracted from its own mines at market value for determining the true profit derived by the 100% EOU for the purpose of computing the income illegible for exemption u/s 10B. We also noted that the assessee has also purchased crude ore i.e ROM from outside parties i.e from mining belonging to the other parties. The price paid by the assessee to these outside parties, in our opinion can be regarded to be the best evidence for determining the market value of the crude ore used by the assessee extracting it from its own mines. Since determination of market value requires verification on the part of the revenue, we, therefore, restore this issue only for determining the market value of the crude ore consumed by the assessee on the basis of the value paid by the assessee for the crude ore to the outside parties during the year and thereby recomputing the profit derived by the assessee from the 100% EOU units eligible for exemption u/s 10B. Accordingly, we direct the Assessing Officer to recompute the exemption available u/s 10B to the assessee in respect of Amona as well as Chitradurga units after ascertaining the market value of the crude ores transferred by the assessee to these units from its extraction divisions on the basis of the average market value as the assessee has paid to the outside parties for the crude ores purchased by the assessee from these parties during the impugned assessment year and substituting as cost of the raw material in place of cost of the crude ore derived by the assessee from its own mines after giving proper and sufficient opportunity to the assessee to adduce the material and evidence in this regard.
45.22 With regard to Codli unit, the assessee claimed before us that the input in this case is „tailings‟ which is merely a waste product and does not involve any cost and also has not fetched any price in the open market, 166 ITA No. 72&85/PNJ/2012 therefore, its market value is nil for the purpose of computation of profit eligible for exemption u/s 10B from this unit. We find force in the submission of the assessee but in the interest of justice and fair play to both the parties, in respect of this unit also we direct the assessing officer to recompute the profit of this unit eligible for exemption after satisfying himself about the fair market value of „tailings‟ after giving proper and sufficient opportunity to the assessee to prove the market value of the tailings used in the Codli unit and allow the assessee exemption to the assessee u/s 10B of the Income-tax Act, 1961 for Codli unit on the profit so recomputed accordingly. The assessee is directed to adduce the necessary evidence on which it may rely to prove the market value of inputs before the assessing officer. Thus, the ground nos. 7, 8 & 9 are partly allowed.
46. Grounds nos.10 & 11 in assessee‟s appeal relate to disallowance of depreciation claimed u/s 32(1)(iia). The brief facts of the case are that the assessee claimed additional depreciation amounting to Rs.10,91,79,435/- and Rs.10,01,21,951/- in respect of iron ore division and Rs.90,57,484/- for Metallurgical Coke Division. The AO took the view that the assessee was not engaged in the manufacture or production of any article or thing and therefore, the decision of the Hon‟ble Supreme Court in the case of the assessee 271 ITR 331 relating to additional depreciation is not applicable. The said decision relate prior to 1.4.1999. According to him, there is no change either in the name or in the composition of the iron ore before extraction and after extraction and processing and the conditions as laid down u/s 2(29BA) are not fulfilled. Similarly, it was held that in the case of conversion of coal into coke there is no different chemical composition or integral structure in the new article and it has no different character and use. Reliance was placed on the decision of the Supreme Court in the case of CIT Vs Gem India Manufacturing Co., 249 ITR 307(2001) and Lucky Minerals (P) Ltd., 116 Taxman 1(SC). The assessee went in appeal before the CIT(A). The CIT(A) also took the view that the assessee primarily engaged in the process of converting coal to coke essentially there is not much of difference in the physical and chemical characteristic of coal and coke. The division is not associated with any kind of extraction of coal or any other ore as part of its business activity. In the case of CIT Vs Sesa Goa Ltd., 271 ITR 331(SC) 167 ITA No. 72&85/PNJ/2012 the Hon‟ble Apex Court held that for an activity to be production, it should comprise of both extraction of iron ore and its processing. The learned AR reiterated the submissions made before the CIT(A). It was contended that the assessee engaged in the business of extraction and processing of iron ore. The assessee is processing the iron ore not only one which is extracted out of its own mines, but also the one which is extracted from the mines which are hired. The Hon‟ble Supreme Court has clearly held that the extraction and processing of iron ore amounts to production. There is no subsequent amendment in this regard or introduction of the definition of the word production in the Act. Sec.32(1)(iia) used both the word „manufacture‟ or „production‟ and does not require that the assessee should be engaged in the manufacture and production. Sec.2(29BA) of the Act defines the word „manufacture‟. The CIT(A) took the view that the iron ore processing plant at Codli, Amona and Chitradurga do not amount to either „manufacture‟ or „production‟. The revenue is fully aware of that in these plants, the assessee has used the iron ore extracted from its mines and also from other mines taken on lease for processing to make it marketable for export. Sec.32(1)(iia) only requires that the assessee must be engaged in the business of manufacture or production of any article or thing. Thus, the assessee must be allowed investment allowance so far as it relates to plant and machinery used in iron ore division. In respect of claim of the assessee for the additional depreciation for the plant and machinery installed in metallurgical coke division, the assessee contended that sec.32(1)(iia) nowhere requires that the new plant and machinery must be acquired or installed for manufacture or production. The only condition subject to the proviso therein is that the assessee must be engaged in the business of manufacture or production or article or thing. The learned AR also tried to explain the process of coke division to prove that the coke division is engaged in the production of an article or thing. The learned DR on the other hand relied on the order of the CIT(A).
46.1 We have carefully considered the rival contentions alongwith the order of the tax authorities. Sec.32(1)(iia) laid down as under;
168ITA No. 72&85/PNJ/2012 ― iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31 st day of March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing (or in the business of generation or generation and distribution of power ) a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause(ii):
Provided that no deduction shall be allowed in respect of-
a) Any machinery or plant which, before its installation by the Assessee, was used either within or outside India by any other person; or
b) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or
c) Any office appliances o road transport vehicles; or
d) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction(whether by way of depreciation or otherwise) in computing the income chargeable under the head ‗Profits and gains of business or profession‖ of any one previous year‖.
46.2 From the provisions of the section, it is apparent that the assessee is entitled in the case of any new machinery or plant which has been acquired or installed by him after 31.03.2005 for the additional depreciation if the assessee is engaged in the business of manufacture or production of any article or thing. Proviso to section denies the deduction to an assessee of the additional depreciation in certain cases. From the balance sheet and all other evidences filed before us it is apparently clear that the assessee is engaged primarily in the business of extraction of ore and its processing. The authorities below interpreted the provisions of section, correctly taking the view that the plant and machinery should be installed for the production of an article or thing. The assessee‟s plants at Codli, Amona and Chitradurga whether engaged for the manufacture or production independently, in our view, is not relevant. The relevant consideration is that the assessee must be 169 ITA No. 72&85/PNJ/2012 engaged in the business of manufacture or production of any article or thing and the new plant and machinery must be acquired and installed. The assessee has extracted the iron ore and also processed it. The case of the assessee is duly covered by the decision of the Hon‟ble Supreme Court in assessee‟s own case reported in 271 ITR 331(SC) (supra). This section used the word „business of manufacture or production‟ not the word „manufacture and production‟. We do not agree with the revenue that the case of the assessee is not covered by the decision of the Hon‟ble Supreme Court in assessee‟s own case. Respectfully following the decision of the Hon‟ble Supreme Court in assessee‟s own case, we delete the disallowance and allow the additional depreciation to the assessee amounting to Rs.10,91,75,435/-.
Revenue's appeal:-
47. The first ground is revenue‟s appeal is general in nature and does not require any adjudication.