―8.1 I have considered the observations of the assessing officer and the explanation furnished by the assessee in this regard. The claim of the assessee that Education Cess and Secondary & Higher Secondary Education Cess is paid under the law for providing finance for basic, secondary, and Higher Secondary Education and therefore, such payment was for the purpose of the business is without any substance. The fact remains that the Education Cess and Secondary & Higher Secondary Education Cess are collected as part of Income Tax and Fringe Benefit Tax. The fact that the cess is applied for the purpose of promoting basic education and higher secondary education will not change the nature of the levy in the hands of the assessee. The amounts collected by way of Education Cess and Secondary & Higher Secondary Education Cess forms an integral part of the direct tax collection and therefore such payments are clearly covered under the provisions of section 40(a)(ic) and (ii) of the Income tax Act.57
ITA No. 72&85/PNJ/2012 8.2 Further it is also admitted that the assessee had claimed deduction of Rs.19,88,55,081/- towards the Education Cess and Secondary & Higher Secondary Education Cess, by a separate letter dated 5.10.2011, after filing the return. This is a clear case where the assessee had claimed deduction after the return was filed. The claim was neither made in the original return of income nor in any revised return of income was filed in this regard. Therefore, even without going into the merits of the claim, the same cannot be allowed as a deduction following the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT, 284 ITR 323. In this case the Court has held that where an assessee has claimed deduction after the return has been filed, the assessing authority has no powers to entertain such claim made otherwise than by a way of a revised return. Therefore, respectfully following the decision of the Hon'ble Supreme Court, the claim of the assessee is also liable to be rejected.
8.3 In view of the above discussion, I am of the considered opinion that the assessee's claim for deduction of Education Cess and Secondary & Higher Secondary Education Cess is not maintainable and therefore the same has been rightly rejected by the Assessing Officer. Accordingly, I confirm the action of the Assessing Officer in rejecting the claim of the assessee. This ground of appeal is accordingly, dismissed.‖
34. The Learned. A.R. contended that the education cess and secondary and higher education cess are paid for providing finance for quality education and therefore it has been incurred for the purpose of the business. The payment of said cess is not specifically covered within the provisions of disallowance u/s 40(a)(ia) & 40(a)(ii) or any other provisions of the Act. The Learned D.R. on the other hand contended that no deduction towards the payment of the education cess and higher secondary education cess was claimed in the original return. Even no revised return was filed making this claim. The education cess and secondary and higher secondary education 58 ITA No. 72&85/PNJ/2012 cess forms an integral part of direct tax collection and therefore such payments are clearly covered under the provisions of section 40(a)(ia) and (ii) of the Act.
35. We heard the rival submissions and carefully considered the same. In our opinion, education cess and secondary higher education cess levied by the assessee has been collected as part of the income-tax and the provisions of section 40(a)(ic) & (ii) are clearly applicable and the assessee is not entitled for the deduction. The said payment is not a fee but is a tax. In case of fees, payment is made against getting certain benefit or services while tax is imposed by the Government and is levied for which the person who pay the tax is not promised in return to get any benefit or service. The assessee is not getting any benefit or services in return by making the payment towards the education cess and secondary higher education cess. Therefore, it cannot be said that it is an expenditure incurred wholly and exclusively for the purpose of the business and is not part of tax. We do not find any infirmity or illegality in the order of the CIT(A) while confirming the disallowance made by the assessing officer in this regard. Thus, disallowance of Rs.19,72,00,814/- is hereby confirmed. Thus, this ground stand dismissed.
36. The ground nos. 6, 7, 8 & 9 relate to the claim of the deduction by the assessee u/s 10B of the Act in respect of its 100% export oriented units at Amona in Goa, at Chitradurga in Karnataka and at Codli in Goa. During the year, the assessee claimed deduction in respect of 3 units located at Amona, Chitradurga & Codli respectively. Of these 3 units, the Codli unit is registered as an EOU from the initial stages of setting up while the other two units at Amona and Chitradurga were originally set up in domestic tariff areas, which were subsequently converted as EOUs. The assessee is engaged in the business of mining and export of iron ore and manufacture and sale of metallurgical coke. The assessing officer disallowed the said claims made u/s 10B of the Act in respect of all the units. The main reason given by the AO was that there is no production or manufacture involved in the activities carried out in the units. The assessing officer took the view in respect of Amona and Chitradurga unit that these units started commencement of the manufacture in the year 1985 and 1994 respectively and therefore, cannot be 59 ITA No. 72&85/PNJ/2012 treated as new units eligible for the benefit u/s 10B merely on the ground that there was expansion of these units by way of purchase of new plant and machinery in the years 2002-03 & 2005-06 respectively. In respect of ultra fines recovery plant at Codli, the assessing officer gave the reasons mainly that (a) the said unit does not fulfill the conditions of manufacture or production as required u/s 10B (b) no satisfactory evidence has been produced regarding the date of commencement of manufacture or production
(c) The fresh approval of the board is not available to the unit and (d) the unit is not debiting any purchase cost in respect of the purchase of wastage from other units. In respect of three units in general, the assessing officer held (a) the iron ore processing cannot be treated as "manufacture or production in view of the insertion of new section 2(29BA) defining the meaning of manufacture/production" (b) the assessee had not maintained separate books of accounts for the EOU units and for non-EOU units and setting up of a unit in the old mines which are already being operated by the assessee cannot be treated as new unit. The assessee went in appeal before the CIT(A). The CIT(A) dealt with the deduction in respect of each of the units separately. The CIT(A) confirmed the order of the assessing officer by sustaining the disallowance of the deduction claimed u/s 10B in respect of Amona Unit, Codli Unit and Chitradurga Unit. The CIT(A) as per the discussion held under para 10.4 to 11.7 took the view that no new unit has come into existence at the Amona plant during the year 2002-03. Similarly, no new unit came into existence at Chitradurga plant during the year 2005-06 or in the subsequent year by summarizing as under, under para 12 of its order.
―The assessee has only installed of few discrete standalone equipments which cannot be held to constitute a separate undertaking having its own identity and capable of functioning as an independent unit.
The identity of the old unit comprising of the old and existing machines & equipments, was not lost.
The increase in the production of iron ore cannot be attributed to the installation of new plant and machinery‖..
Therefore, in view of the above, it is clearly established that no new unit has come into existence at the Amona plant during the year 2002-
03. It is only a case of reconstruction of the existing unit in which the old structures in the plant including some of the machines and equipments were repaired hand renovated and some additional machines and equipments were newly installed. Similarly, no new unit also came into existence at the Chitradurga plant of the assessee 60 ITA No. 72&85/PNJ/2012 during the year 2005-06 or in the subsequent years. It is also a case of reconstruction of the existing unit involving repair and renovation of the old structure and other plant and machinery. Therefore the assessee is not eligible to claim deduction under section 10B in respect of both its units at Amona and Chitradurga for the assessment year 2009-10, which is much beyond the period of 10 conservative years, as prescribed in this section.
37. The CIT(A) has also discussed various case laws as relied by the assessee under para 30 of its order. The CIT(A) has also held that the unit at Chitradurga was earlier in the domestic traffic area. During the financial year 2008-09, the assessee wanted to convert the unit as an EOU and submitted its application in the concerned authorities dated 15.2.2008 and as per instruction no.2 dated 9.3.2009 of the CBDT, the approval granted by the Development Commissioner in such cases will be considered as valid. One such approval is ratified by the board of approval for EOU scheme. The approval was ratified by the Board on 14.1.11. Therefore, for the assessment year 2009-10, there was no approval of the board. CIT(A) ultimately took the view that the assessee was not engaged in manufacturing or production. The iron ore at Amona and Chitradurga plants of the assessee are not entirely from the iron ore extracted by the assessee from its mines. Part of the iron ores fed to the beneficiation unit at Amona is purchased by the company. Mines of the assessee from which iron ores are fed to the Amona and Chitradurga plants are very old which are being exploited by the company since long. The CIT(A) took the view that since the mines of the assessee are not new, it cannot be said that they formed part of the undertaking at Amona and Chitradurga, even if these two units are considered to be new. It was further held that the Amona and Chitradurga units cannot be said to have been engaged in extraction activities, therefore, the activities of Amona and Chitradurga plants cannot be held as manufacturing or production keeping in view the decision of the Supreme Court in the case of the assessee which has been followed by the I.T.A.T. bench in the case of M/s. Chowgule and Company Ltd (I.T.A No. 162 & 184/PNJ/2006 and Misc. Application No. 23/PNJ/2007) and in the case of V.S. Dempo and Company Pvt. Ltd. (ITA No. 44/PNJ/2009). It was held that alternatively if the mines from which iron ore is supplied to the processing plants are considered to form part of the undertakings at Amona and Chitradurga, such undertakings cannot be thus held to be new undertakings in view of the old mines forming part of such 61 ITA No. 72&85/PNJ/2012 undertakings. CIT(A) ultimately under para 15.3 held that the activities of the assessee in two units at Amona and Chitradurga would not amount to manufacture by observing as under:
"Therefore, in the present case of the assessee, the question whether the activities of the two EOUs at Amona and Chitradurga would amount to `Manufacture' or not has to be necessarily answered by referring to the definition of `Manufacture' provided under section 2(29BA) of the Income Tax Act, which is applicable for the assessment year under reference. Considering this definition, it is sufficiently clear that the iron ore processing activities of the assessee at the EOUs at Amona and Chitradurga do not amount to `manufacture'. Therefore, the claim of the assessee to adopt a liberal view for interpreting the definition of `manufacture' cannot be accepted.‖ 37.1. The CIT(A) is of the view that the percentage of the old machinery in the case of both the units will certainly exceed 20% of the total value of the plant and machinery. Referring to the application of the assessee made before the Development Commissioner, it was noted by the CIT(A) that the applications were for conversion of existing DTA units to EOU units and not for establishment of the new undertaking and ultimately on this basis, the CIT(A) held that the assessee is not eligible to claim deduction u/s 10B of the Income-tax Act in respect of Amona and Chitradurga units. In respect of Codli unit the CIT (A) confirmed the finding of the AO that there is no manufacturing or production or article or thing. What is fed as raw material to the Codli unit is iron ore and what comes out after processing it also iron ore, the only minor difference being in the iron content of the material. The CIT (A) relied on the decision of the Supreme Court in assessee‟s own case 271 ITR 331 for the proposition that extraction and processing of iron ore together constitutes production. CIT (A) also held that the assessee company has not produced any satisfactory evidence with regard to date/year of commencement of business of the unit. Ultimately the disallowance of the claim of the assessee u/s 10B in respect of all the three units was sustained.
38. The Learned. A.R. contended that the assessee has 9 units, out of which it claimed exemption u/s 10B of the Act in respect of profit derived from 3 units. The profits from the 3 units i.e. the EOUs are in the same proportion as to the other units. Profits from EOU were 48% on sales of Rs.931/- crores while profit from other units were Rs.1,706/- crores on sale of Rs.3,352/- crores. Thus the profits from the EOU were 48% while from the other units 62 ITA No. 72&85/PNJ/2012 were 51%. For the sake of convenience and as argued by both the sides, we would like to deal with ground relating to exemption u/s 10B in respect of each of the three units owned by the assessee separately.
38.1 In respect of the Amona plant the assessee claimed exemption u/s 10B for a sum of Rs. 2,57,23,14,771/-, the learned AR contended that the plant at Amona was set up in 1985 in Bicholim Taluk. Over the years the plant was eroded and outdated. During the financial year 2002-03 after complete re- vamping of the earlier plant, a new plant was set up by installing new machines alongside using some parts of the old machines. The cost of the new plant and machineries for all major/critical processes and the civil structures amounted to Rs.3,96,10,020/- the WDV of the old plant and machinery used in the new undertaking was Rs.26,17,714/- which was around 6.7% of the new plant & machinery. Attention was drawn to paper book Vol-I (45-48). He submitted that the details represent the part of the depreciation schedule filed along with the return and the books of the assessee were not rejected during the Financial Year: 2003-04. During the Financial Year 2008-09, the DTA unit set up in Financial Year 2002-03 was converted into 100% EOU in terms of approval from the O/O Development Commissioner, Ministry of Commerce & Industry, Mumbai, vide approval no. PER:44(2007)IAII/39-07-08 dated 28-03-2008 and the same was ratified by the Board of Approval in its meeting held on 03-06-2008 (page 41-44 of the first paper book). The premises of the undertaking were bonded and licence no.4/2008 dated 23-07-2008 was issued u/s 58 of the Customs Act at page 280 of the paper book. The conversion of the DTA unit into EOU unit became final on the receipt of Customs licence No.4/2008 dated 23-03-2008 duly bonding the premises. The unit started functioning as EOU. The information for the same was given to the Development Commissioner vide letter dated 24-07-2008. For this attention was drawn to page 64 of paper book Vol.I. It was submitted that the assessee accordingly made the claim u/s 10B of the IT Act during the year. This was the 7th year of existence of the unit and the deduction u/s 10B was claimed for the first time. In the months of November and December, 2011, the Assessing Officer made certain enquiries which were replied. Attention was drawn to pages 58 to 113 of paper book Vol.I. On 23-12-2011 a survey u/s 133A was conducted in the premises of all the 63 ITA No. 72&85/PNJ/2012 units. The survey only re-confirmed that initially a unit was set up during the year 1985 and major renovation and modernization took place during the Financial year 2002-03. During renovation and modernization, it was submitted that not only the new/latest technology on the main process of the machines i.e., screening / Schenck (Australia) Banana Screening machine was introduced but the capacity of the plant was also enhanced from 1 MTPA (Million Tons Per Annum) to aprox. 2 MTPA with further flexibility to increase the same further. Our attention was drawn towards the production data from the year 1999-2000 to 2000-01 submitting that production has increased drastically which was 9.17 lacs MT in 1999-2000 and was 10.38 lacs MT in 2000-01. It was pointed out that during the year 2002-03 the production was 11.29 lac MT and this year was a transition year. Attention was also drawn to page-239 of the paper book, which gives the details of production data of few years after set-up. These are reproduced as under:
FY MT (Lacs) 2002-03 11.29 2003-04 15.50 2004-05 15.14 2005-06 16.78 2006-07 17.62 2007-08 21.46 2008-09 29.87 2009-10 30.70 2010-11 22.86
Thus it was contended that the production had increased in a phased manner from 9.17 lac MT in Financial Year 1999-2000 to 30.7 lac MT in Financial Year 2009-10.
38.2 It was stated that the assessee submitted the following documents to the Assessing Officer and the same are produced before this Tribunal;-
a. LOP No.PER:44(2007) IA-II/39/07-08/2606 dated 28/3/2008 (Page nos. 41-43 Paper Book Vol.I 64 ITA No. 72&85/PNJ/2012 b. Board of approval No.SEEPZ/IA-II/44/2007-08 /6053 dt.6/7/2009 Page No.44 of Paper Book Vol.I.
c. Customs Licence No.4/2008 dt.23/7/2008 for private bonded warehouse- page no.280, Paper Book Vol.I.
d. Green card No.02029 page nos.281-282 of Paper Book Vol.II. e. Factory licece no.Goa/1132 dt.4/11/2003 page no.283 of Paper Book Vol.II.
f. Letter dt.24/7/2008 intimating the Development Commissioner about the commencement of commercial production page no.64 of Paper Book Vol.I.
g. LUT page No.76 of Paper Book Vol.I.
h. Report of CA on form No.56G page nos.10-12 of Paper Book Vol.I. i. Details of Computation of deduction u/s10B page no.6 of Paper Book Vol.I.
j. Plant & machinery- Depreciation chart/fixed asset schedule for Assessment Year 2003-04 to 2009-2010 page nos.45-48 of Paper Book Vol.I.
k. Note on the production process of the undertaking page nos.21-30 of Paper Book Vol.I.
l. A note on setting up EOUs page Nos.31-32 of Paper Book Vol.I. m. A note for comparison between EOU and Non EOU profitability % page No.91 of Paper Book Vol.I.
38.3 During the survey a statement of Shri H.K.Moorthy and Shri Ulhas Kerkar both technocrats by profession were recorded. This statement is available at page 728-731 and 714 to 716 of additional paper book Vol.I. The Assessing Officer took a view that the Amona unit was set up in the year 1985 and alleged that it was not a new unit but merely a re-construction and disallowed the claim of the assessee u/s 10B of the IT Act. Several papers were impounded during the survey, but copies of these papers were made available to the assessee in March 2012, when the proceedings were pending before the CIT(A). The Assessing Officer disallowed the claim made u/s 10B of the IT Act, as the main reason was that there was no production or manufacture involved in the activities carried out in the unit and the unit is old one. In respect of the averment of the Assessing Officer that the said unit is 65 ITA No. 72&85/PNJ/2012 not engaged in any manufacture or production of article or thing. It was submitted that the Assessing Officer would not have understood the facts properly and therefore, a wrong interpretation of the decision of the Supreme Court in the case of Sesa Goa Ltd., 271 ITR 331 was taken. As per the Assessing Officer the ratio of the aforesaid case that both extraction and processing of crude ore are necessary to make a case of production whereas in High Court decision which was confirmed by the Supreme Court on appeal by the department no such reasoning was recorded anywhere. In fact the references were made to three High Court‟s decision in which it was held that the extraction itself was production. The famous case of Chowgule (Supreme Court) in sales tax matter was also distinguished in this case. In fact based upon Sesa Goa (Supreme Court) several cases have been delivered by the Supreme Court including „Oracle‟ where one simple process of copying software onto a blank CD was also held to be production. Reliance was placed on the following other cases;
a) Arihant Tile & Marbles Ltd Vs Income Tax Officer (2007) 295 ITR 1348 (Raj.)
b) CIT Vs Fateh Granite (P) Ltd.,(2009) 314 ITR 32 (Bom.)
c) CIT Vs Oracle Software Indi Ltd.,(2010) 320 ITR 546(Supreme Court)
d) Tata Tea Ltd Vs ACIT (2011) 338 ITR 285(Ker.)
e) Madhu Jayanti Intl.Ltd., Vs DCIT (2012) 137 ITD 377(Kol.)(SB)
f) Chowgule & Co., Ltd, Vs ACIT Panaji, Bench in I.T.A. No. 162/PNJ/2006 dt. 12-07-2007 to be read with the Misc. Application in ITA No. 184/PNJ/2006 dt.19-07-07.
On the issue that the assessee has not maintained separate books of accounts for the EOU Units and non-EOU Units, it was pointed out that there is no such requirement u/s10B of the IT Act In this regard reliance was placed on the following decisions;-
a) DCIT Vs Arabian Exports Ltd., 109 TTJ.(Mum.).440
b) International Instruments (P) Ltd., Vs CIT 123 ITR 11(Kar.)
c) CIT Vs Mazagaon Dock Ltd., 191 ITR 460(Bom.) 66 ITA No. 72&85/PNJ/2012
d) CIT Vs Abhirami Cotton Mills 220 ITR 84
e) CIT Vs Bongaigaon Refinery & Petrochemicals Ltd., 38.4 In respect of the finding of the Assessing Officer that no such evidence has been produced by the assessee for the date of commencement of manufacture or production. It was submitted that the assessee duly informed the Development Commissioner, SEZ, Mumbai vide letter dated 9/3/2008 that its commercial production started on 8/3/2000. Copy of this letter was also sent to the Customs Department.
38.5 In respect of the observations of the Assessing Officer that the unit is not a new unit as the assessee has already an existing unit set up in1985 and it is a case of reconstruction. It was submitted that the guiding principles on various rulings both initial as well as recent ones when tested to the facts of the case confirm that during the financial year 2002-03 the entire unit was set up wherein communication with the Panchayat etc., particularly Panchnama and newspaper clipping brings out clearly that a complete destruction of old unit was done and altogether new plant was set up albeit with the aid of some old machines and some parts thereof. Mere usage of word „renovation‟ in some communication with few authorities cannot be accorded undue weightage disregarding all other corroborative evidences. In this regard reliance was placed on the following decisions;
a) Textile Machinery Corpn .Ltd.,Vs CIT 107 ITR 195
b) CIT Vs Indian Aluminium Co.,Ltd., 108 ITR 367 (Supreme Court)
c) CIT Vs Orient Paper Mills Ltd., 176 ITR 110 (Supreme Court)
d) Mettur Chemical & Ind. Corpn. Ltd Vs CIT 217 ITR 768 (Supreme Court)
e) CIT Vs Mahaan Foods Ltd. (2008) 216 CTR (Del) 148
f) Gujarat Alkalies and Chemical ltd., Vs CIT 249 CTR (Guj.) 82
g) Taurus Merchandise (P) Ltd., Vs Income Tax Officer (2012) 143 TTJ (Del.).
38.6 It was submitted that as the first unit was set up during the year 1985 had become outdated, obsolete and uneconomical and it became dangerous 67 ITA No. 72&85/PNJ/2012 to run the old unit. The assessee has to take up immediate action for setting up the new plant during 2002-03. Substantial capital of Rs.6.5 crores was inducted while the old machinery worth Rs.26.00 lakhs was used and no identity of the old unit was retained and the capacity of the plant was substantially increased from 1 MTPA to 2 MTPA and further in-built flexibility to expand thereafter which took place during the financial year 2008-09. If the new unit was not set up, the existing business of the assessee would have come to an end. All major machineries were installed afresh with capacities more than doubled and with scope to make further expansion. The earlier physical layout/foundations were totally dismantled and in place of the same, new foundation were erected. The Assessing Officer merely referred to the usage of the word „renovation‟ in various communications exchanged between the assessee and the Village Panchayat of Amona whereas he completely ignored the newspaper clipping which appeared in the local Marathi newspaper „Pudari‟ dated 31/7/2002 which carried a full news item in relation to on-going construction activities at the Amona plant of the assessee and referred the same as illegal construction of a new plant as also the „Panchanama‟ conducted by the Amona Gram Panchayat (page 299). The Panchanama was carried on 7/9/2002 stating that it was a new construction having steel fabrication with RCC foundation.
38.7 The production process employed at Amona unit before setting up of the new plant during financial year 2002-03 and financial year 2005-06 respectively clearly shows that the process underwent a sweeping change and latest screening technology was introduced (Page-393). The details of major machinery and equipments employed used in the said unit in the old and new plant shows that the latest technology was used in the new plant.(Page 394) 38.8. It was submitted that Ore was processed/produced in Amona unit out of the Ore extracted from own mines at Goa & Karnataka and also the same purchased from third parties as per details given below;
Break up of purchase of (crude ore)
From own mines at Goa Rs. 45,25,03,692
From own mines at Karnataka Rs. 43,11,06,896
68
ITA No. 72&85/PNJ/2012
From third parties Rs. 3,16,15,091
Total Rs. 91,52,25,679
38.9 In the computation of deduction claimed u/s 10B in respect of Amona unit, the assessee declared cost of crude ore of Rs.45.25 crores as part of cost production of Rs.55.71 crores, while ore purchased was declared at Rs.43.11 crores transferred from its Karnataka Mines + Rs.3.16 crores transferred from third party leased mines. The beneficiation plant mainly consists of various types of conveyors and screens which are fitted on huge steel structures, whereas the specialized items of plant & machinery are comparatively few in terms of physical quantity and size. The usable steel from the dismantled plant was also re-used along with fresh steel purchases and fabrication charges were incurred on the same in setting up of the new unit. In respect of capital expenditure of Rs.3.96 crores it was submitted that the Bills were filed as under;
P & M bills Amount PB Reference Submitted before the AO NIL Submitted before CIT(A) 2,21,69,787 Page nos.1378 -1435 of Addl. PB Vol.III Submitted before the ITAT 1,35,23,639 Page nos.794-1146 of Addl. PB Vol.II Balance 39,16,594 (9.88%) Total capital expenditure 3,96,10,020
38.10 . During the course of hearing learned AR showed samples of the input called ROM (Run of Mines) which appeared to be pieces of rocks; and output in the form of iron fines and iron ore lumps, which were much less in size as compared to ROM. It was pointed out that practically crude ore is of no use, but the usage of lumps and fines is absolutely essential for steel making industry, which are produced after processing in the beneficiation plant. The activity involved in converting input into output consists of crushing, 69 ITA No. 72&85/PNJ/2012 screening, washing, stacking, loading in barges; river transportation to the port, and export in ships. Even the learned AR by showing the sample requested the Bench to have a site visit by exercising the power u/s 255(6) of the IT Act. The learned DR objected to this. The Bench to make it very clear about the process involved decided to have spot inspection at 3.00 pm on 19/12/2012. During the course of hearing along with both the parties i.e. the assessee‟s counsel, Standing counsel for the department, the ACIT and the Inspector and also the Bench Clerk, the physical inspection of the Amona Unit was carried on 19-12-2012 in the afternoon.
38.11 The learned AR carried us through the order of the CIT(A) and made number of comments on the observation/finding of the CIT(A). On the direction of the Bench, the AR submitted the following synopsis in respect of the disallowbility of exemption to the assessee u/s 10B of the IT Act. These are reproduced a under;
"2. Point-wise response to the observations of CIT(A) in his Order:
2.1 In addition to all the documents which were made available to the AO the following additional documents and information were provided and pleadings were made before the CIT(A) as below;
- Copies of bills of equipment material services amounting to Rs.2.21 crores out of 3.96 crores since the record was very old.
- Various documents impounded during survey were again submitted with CIT(A) duly drawing his attention that major dismantling and demolishing were undertaken. The CIT(A) sought remand report from the AO and considered the contents while adjudicating the appeal.
2.2 At Page 42, as per CIT(A) vide para-10.5: The assessee did not furnish evidence of new machines.
Assessee‟s explanation The CIT(A) was explained that all capitalisation made in the earlier years stood accepted by the department under scrutiny assessments and it was difficult for the assessee to now quickly retrieve all the bills in short time at this stage.
70ITA No. 72&85/PNJ/2012 2.3 At page 43, as per CIT(A) vide para-10.5: All old machines were not replaced.
The number of such new machines and equipments is found to be very small as compared to the total number of plant and machinery deployed in their processing plant. Therefore, the claim of assessee that the old and outdated existing unit was completely replaced by a new set of machines. Is factually incorrect.
At page-47, as per CIT(A) vide para 10.6: By carrying out repairs a new unit is not set up.
By repairing or renovating the rusted and corroded steel structures of the old plant or by changing the location/foundation of the old equipments or installing a few new machines in the entire plant comprising of several such equipments, the assessee cannot claim that it has set up a new unit.
Appellant‟s explanation (common to both the of the above observations) The CIT(A) ignored to consider the explanation of the assessee that the basic cost of plant & machinery in case of an iron ore beneficiation plant is incurred on raising steel and concrete structures on which the conveyor belts, crushers, screens and other such equipments are installed. The CIT(A) overlooked the basic composition of production apparatus required in an iron ore beneficiation plant and made the above naive assertion in a casual manner without any real understanding of the actual production mechanism involved. It is erroneous to compare the number of machines and equipments to conclude whether substantial expansion took place, when the Act itself provides the threshold limit of 20% for the said purpose in Explanation 2 to section 80-I(2) read with Explanation to sec.10B(2).
2.4 At page 48-49, as per CIT(A) vide para 10.7: There was no deletion in the block value of machinery and equipments previously used in Amona plant. Thus, old machinery was not discarded or old plant was dismantled.
71ITA No. 72&85/PNJ/2012 Appellant‟s explanation It is an admitted fact by the assessee that in view of difficulty faced by it in identifying scrap of different machinery items, it opted not to make any deletion from the assets. Instead, the value realised from sale of scrap was offered to full tax by declaring it separately as „other income‟ in the profit & loss accounts during the reconstruction period. This practice was adopted since some machines were either re-used to make out new or modified machines and their steel frames and structures were also re-used (wherever technically) possible considering its strength). Moreover, it needs to be appreciated that by adopting to this treatment, the assessee subjected itself to a disadvantageous position since had it made the deletion of scrap value from the block of assets, it would have achieved lesser depreciation but would have escaped full tax that it paid on the scrap value received. But in any case, the written down value of old machines was substantially lower than the threshold limit of 20% prescribed in Explanation 2 to sec.80-I(2) read with Explanation to sec.10b(2).
2.5 At page 50-53, as per CIT(A) vide para 10.8: Correspondence with Village Panchayat shows that the construction activities were actually in the nature of repairs and renovation.
Appellant‟s explanation The CIT(A) referred to few communication with the Panchayat to make a case that it was only a normal repairs or renovation work undertaken. He did not refer to several other communications and documents which clarified that the assessee carried out major dismantling and demolition as well as new plant was set up.
CIT(A) referred to various communication wherein phrases like urgent repairs and renovation etc., The CIT(A) misled and misconceived in his thought process, opted to disregard the context completely. Neither he gave attention to certain critical documents nor to the fact that it was not a green field project (i.e. the assessee was not setting up a factory for the first time on a piece of land which was hitherto used for non- commercial or non-industrial purpose).
72ITA No. 72&85/PNJ/2012 2.6 At page -79, as per the CIT(A) vide para-14: No material change in the input and the output of the unit, which essentially remains as iron ore.
Appellants explanation This observation is patently wrong. The input is crude ore whereas the output is lumps and fines. Not only the physical appearance is absolutely different but even the commercial name and usage are both far different. There is practically no use of crude ore but the usage of lumps and fins is absolutely essential for steel making industry. It seems that the CIT(A) got misled by the loose usage of the term iron ore without verifying the actual facts.
Moreover during the course of hearing before the Hon‟ble ITAT, the assessee company showed samples of the input in the form of crude ore and the output in the form of iron ore and lumps. The activity was explained in detail which encompass transportation of crude ore, crushing, screening and washing, stacking, loading in barges, river transportation to the port and export in ships. The assessee has also mentioned that it would be willing to show the nature of activity inviting the Hon‟ble Members for a site visit in order to have on the spot understanding of factual matters. It was requested that though the claim was made u/s 10B in respect its three units Amona, Chitradurg and Gadia Sado (Codli) but considering the non-feasible to inspect all the three units, the nearest unit, Amona 100% EOU may be taken up for the site visit. The Hon‟ble Members asked the Departmental Representative also to accompany the site visit. Accordingly, a site visit to Amona unit was arranged for the Hon‟ble Members on 19-12- 2012 in the afternoon. From the tax department the Standing Counsel. JCIT, ACIT and inspectors together with ITAT Bench Clerk accompanied the Hon‟ble Members for site visit. The activity was explained on sight to the invite in a details manner.
2.7 At Page 79, as per CIT(A) vide para 14.1: In CIT Vs Sesa Goa Ltd.
(2004) 271 ITR 331 (SC), it was held that „extraction and processing of iron ore‟ undertaken together amount to „production‟.
Appellants‟ explanation 73 ITA No. 72&85/PNJ/2012 The judgment in CIT Vs Sesa Goa Ltd., (2004) 271 ITR 331 was delivered by the Hon‟ble Supreme Court in assessee‟s own case. The facts were that the assessee owned transport vehicles like dumpers, etc. which were employed in conveying crude ore from its mines to the beneficiation plant for processing and thus, declared as plant and machinery. It was explained that instead of installing the conventional conveyor belt system from the mines to the beneficiation plant for conveying crude ore, the assessee had chosen the cost effective way of conveying it through an on-wheel conveying system i.e. through dumpers etc., and which machines did not have any other use. Therefore, for all practical purposes these were not vehicles as understood in the ordinary sense, but plant and machinery in the case of the assessee. Accordingly, the assessee claimed investment allowance u/s 32A on the said assets, but it was disallowed by the assessing authority under the averment that those assets had not been used in the manufacturing process. After passing through the course of appellate proceedings before the CIT(A) and the ITAT the matter travelled to the High Court.
The Hon‟ble Panaji Bench of the High Court of Bombay, while answering the question „Whether on the facts and circumstances of the case, the ITAT was justified in holding that the assessee is entitled to deduction of investment allowance u/s 32A of the IT Act, 1961 in respect of machinery used in mining activity, ignoring the fact that the assessee is engaged in extraction and processing of iron ore not amounting to manufacture or production of any article or thing?", held as under (266 ITR 126):
At the end of last but one para of the order.... ―The Act also contains internal evidence to show that the legislature has treated raw ore differently from processed ore. A Division Bench of this court in CIT Vs Emirates Commercial Bank Ltd., (2003) 262 ITR 55 has given the benefit even in respect of data processing done on computers. In other words, the legislation being a beneficial piece of legislation, an expanded meaning should be so given and has to be given.‖ 74 ITA No. 72&85/PNJ/2012 Thus, the Hon‟ble Bombay High Court ratified the position that raw ore was different from processed ore. Further, while agreeing with the decision reached on 262 ITR 55 (supra) in respect of the data processing that the same amounted to production, it has basically decided that the processing of iron ore also amounts to production following the same analogy. It can be so concluded since the data processing on computers does not involve extraction of an article or thing from earth, and, therefore, the reliance of the said judgment here can only be in respect of processing of the ore and not extraction of the ore.
Further, in the last para of their order, the Hon‟ble Bombay High Court held..... ―The ore has to be extracted or raised from the earth in which it is embedded and has to be brought to the surface. What is brought to the surface is something new which comes into existence as an article or thing. If that be the case, winning or extracting of ore would fall within the expression ‗production'. Thus, on the question put before the Hon'ble High Court whether extraction and processing of iron ore amounted to manufacture or production, it decided that processing of ore was production and also that extraction of ore was also production.‖ However, the department preferred further appeal before the Hon‟ble Supreme Court, where the same question as put before the High Court was re-examined by the Apex Court. The Apex Court held as under (271 ITR 331)....
―The reasoning given by the High Court, in the decisions noted by us earlier, is in our opinion, unimpeachable. This court had, as early as in 1961 in Chrestian Mica Industries Ltd. Vs State of Bihar (1961) 12 STC 150 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 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, product of human activity or effort. From the wide definition of the word production, it has to follow that mining activity for the purpose of production of mineral ores would 75 ITA No. 72&85/PNJ/2012 come within the ambit of the word production, since ore is a thing which is the result of human activity or effort. It has also been held by this court in CIT Vs N.C. Budharaja & Co., (1993) 204 ITR 412 that the word production is much wider than the word ‗manufacture'‖.
We are therefore, of the opinion that extraction and processing of iron ore amounts to production within the meaning of the word in section 32A(2)(b)(iii) of the Act and consequently, the assessee is entitled to the benefit of sec.32A(1) of the Act.‖.
It must be appreciated that the Apex Court categorically expressed that the reasoning given by the High Court on the meaning of word production as unimpeachable in its opinion, and since a common phase „extraction and processing of iron ore‟ had been employed in the question. It was also answered in the singular manner only by the Apex Court. However, what must be understood is that the Hon‟ble High Court in 266 ITR 126 nowhere held that both extraction and processing of ore shall have to be undertaken together to constitute production. Therefore, it cannot be understood that the Apex Court decided the issue in any different manner and it must be safely concluded that extraction of iron ore and processing of iron ore were independently held as production. Accordingly, the assertion of the department that extraction and processing should both be undertaken together in order to pass the test of production is just misgiving and against the spirit of the above decisions of the Hon‟ble Bombay High Court and the Supreme Court.
Furthermore, even in the case of Chowgule & Co., Ltd., relied upon by the department, it must be appreciated the order dated 12/07/2007 of the Hon‟ble Panaji Bench of ITAT in ITA No.162/Pnj/2006 was immediately rectified by the same Bench in Misc. Appn. moved by the assessee inMA.NO.23/PNJ/2007 order dated 19/7/2007 where it was finally held; We hold that the assessee-company itself is extracting the entire iron ores and thereafter processing the same, and therefore, entitled for the deduction u/s 10B as held by the Supreme Court in the case of Sesa Goa.
76ITA No. 72&85/PNJ/2012 The need for rectification arose since in the original order the Hon‟ble ITAT had held that the assessee was only processing iron ore but was not extracting the ore (Pl. See para-5 order dated 19/7/2007 in MA) But the Hon‟ble ITAT found during the MA proceedings (in the light of sub- para 8 in para-4 of order dated 19/07/2007) that the assessee- company was extracting as well as processing the ore, and therefore, 10B deduction was allowed to the assessee company.
It must be understood that EOU and assessee have different meaning. IT is not necessary that both the extraction of iron ore and processing of iron ore must be carried out by the EOU itself to claim exemption u/s 10B. It must be understood that the mines and processing units are always at a safe distance with each other because mine blasting would otherwise disturb the functioning of the processing units. EOU unit has to be a custom bonded area but the mines are spread over kilometers in area which cannot be made custom bonded. Thus, the mines cannot be made part of the EOU unit in any manner.
However, even if the extraction of iron ore is carried out by the assessee at mines owned by him or by third party (which cannot be covered under EOU) unit as explained above) and only the processing is carried out by EOU unit, even then the assessee will be eligible for 10B deduction for the said EOU as the assessee is extracting as well as processing the ore. This is the decision of the Chowgule because in that case the EOU was using the iron ore extracted by the said company from its own mines and from the mines of Antao Brothers which could not be part of the EOU unit of that assessee is any manner as explained above.
Thus, the basic condition for allowing exemption u/s 10B by holding the extraction and processing of iron ore as production is that the assessee should carry on both these activities by itself and it cannot be understood to mean that both these activities should be carried on by the EOU itself.
In other words the Hon‟ble ITAT did not hold that a EOU qualifying for deduction u/s 10B must undertake both these activities together, rather 77 ITA No. 72&85/PNJ/2012 it was held that if the assessee extracted the ore by itself and also undertook processing of the ore as its EOU, it would qualify for deduction u/s 10B for its ore processing EOU.
In the present case of the assessee also, there is no dispute that the assessee-company namely M/s Sesa Goa Ltd., also undertook both the activities of extraction and processing and has correctly claimed the deduction u/s 10B in respect of profits arising from processing of ore at its EOUs. Thus, the parameters laid down in the above case of Chowgule & Co., by the Hon‟ble ITAT are squarely met by the assessee.
2.8 At page 89, as per CIT(A) vide para-16: For determining the percentage of old equipments used in the new units even the assets held at the extracting unit must be taken into consideration.
The CIT(A) has asserted that to determine the percentage of the old machine reused in the new set up it is necessary to take in to consideration all the old and existing machines of the respective units along with the plant and machinery deployed in the mines of the assessee. He has further averted that if the value of plant and machinery employed in the mines of the company are taken into consideration, then the percentage of old machine will certainly be exceeding the threshold limit of 20% as prescribed. CIT(A) has justified his averments by relying on his interpretation of the judgment of the Hon‟ble Supreme Court in CIT Vs Sesa Goa Ltd., (004) 271 ITR 331 that the activities to be eligible to be held as production should comprise of the extraction a well as the processing of iron ore.
Appellant‟s explanation The assessee has claimed deduction u/s 10B in respect of its beneficiation units only and not the mines. Therefore, there is no rationale in clubbing the machines employed at the mines with those owned by the units for the purpose of calculating the percentage of old equipments used in the new unit. Further, the CIT(A)‟s assertion that if the value of plant and machinery employed in the mines of the company are taken into consideration, then the percentage of old 78 ITA No. 72&85/PNJ/2012 machine will certainly be exceeding the threshold limit of 20% as prescribed, is nothing but presumptuous. Moreover, it has already been explained that in Hon‟ble Supreme Court „s judgment in271 ITR 331 read with Bombay High Court‟s ruling in 266 ITR 126 in the case of Sesa Goa Ltd., it has actually decided that extraction or ore and processing of ore are independently held as production‟.
Alternatively, by reference to the decision of the Tata Tea Ltd. Vs ACIT (2011) 338 ITR 285 (Ker.) and Madhu Jayanti Intl. Ltd., Vs DCIT (2012) 137 ITD 377 (Kol.)(SB), it was contended that in case of an EOU regard has to be given to the definition of manufacture as contained in EXIM policy. Even if the word manufacture had been inserted in the IT Act, it is submitted that it would not deter to draw the definition of production from EXIM policy. As it is settled law, that production is wider than the word manufacture and every case of manufacture can be included in production. The definition given in EXIM policy for manufacture would stand good for the word „production‟. Reference was invited to page 174 to 179 of paper book Vol.I.
The learned AR further submitted that the following guiding principle emerge for the reckoning of a new unit based upon various land mark rulings;
- Where there is infusion of new capital
- Where there is substantial modification in the old unit so as to disturb the identity of the old unit.
- There should be lest possible or insignificant usage of the plant and machinery of the old unit.
- There should be a negative act to disturb the identity of the old unit.
- There is no bar on the existing assessee to set up new units essentially producing the same commodity as in the existing units.
Thus, it was vehemently contended that the AO as well as the CIT(A) were not correct in taking the view that the assessee is not entitled for exemption u/s 10B in respect of Amona plant. It was also specifically pointed 79 ITA No. 72&85/PNJ/2012 out by referring to the decision of the CIT(A) at page-48 that the CIT(A) has wrongly observed that the assessee has not made any addition in the plant and machinery. The assessee has invested the amount in the plant and machinery in Amona plant for this attention was drawn to page-45 to 48 of the paper book. Attention was also drawn towards the Board‟s resolution, annual accounts as well as schedule of the depreciation for the different years. The learned AR vehemently stated that the chart given at page-48 has been compiled by the CIT(A) without considering the audited accounts so as to give an impression the assessee has not made any investment for setting up new plant and machinery in Amona unit.
Chitradurga Unit
39. The learned AR submitted that the assessee claimed exemption u/s 10B in respect of Chiradurga Plant at Rs.1,85,34,16,649/- as per the audit report. This plant was initially set up by M/s A. Narrain Mines Limited., which was acquired by M/s Sesa Goa Ltd., during the FY 1998-99. The position of assets as per books as on 31-03-1999 was under;
Assets Gross Block WDV (Rs. In Lacs) Plant & Machinery 34.77 20.78 Total assets 51.71 31.40
39.1 This company merged with M/s Sesa Goa Ltd., w.e.f. 01-04-2002 in terms of the order dated 06-06-2003 of Bombay high court. 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 Water Act and Air Act 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.
80ITA No. 72&85/PNJ/2012 The following investments were made which resulted in creation of new unit in place of the existing unit.
Sl.No. FY: Plant & machinery (Rs.in crores) 1 2005-06 0.94 2. 2006-07 0.36 3. 2008-09 7.04 Total 9.18
39.2 The value of old plant & machinery used in the new plant was at Rs.6,93,596/- i.e., WDV was on 01-04-2005 and the value of plant & machinery as on 31-03-2006 was at Rs.1,00,78,229/-. The old machinery therefore, valued at a meagre 6.88% as on 31-03-2006, being the closing day of the previous year relevant to the AY:2006-07 which has been declared as the first year of setting up the new unit by the assessee. During the FY 2008- 09 the assessee submitted his application with the concerned authorities for conversion of newly set up unit into an EOU. Approval in this regard was received vide approval no.1/64/2007:PER:EOU:KR:Commissioner, Ministry of Commerce & Industry, Bangalore, which was ratified by the Board of Approval in its meeting held on 14-01-2011. The premises of the undertaking was bonded and Licence NO.1/2008 dated 05-06-2008 was issue u/s 58 of the Customs Act and the commercial production for the converted EOU began on 06-06-2008 and the same was intimated to the Development Commissioner vide letter dated 14-07-2008.
39.3 The assessee submitted the copies of the documents to the AO and the same has been furnished before this Tribunal in the paper book detailed as under;
(a) LOP No.1/64/2007 PER:EOU:KR:CSZ/243 dated 15/02/2008 (Page nos.49-52 of PB Vol.I).
(b) Board of Approval NO.1/64/2007/EOU/CSEZ/225 dated 21/02/2011(Page No.53 of PB Vol.I)
(c) Letter dated 14/07/2008 intimating the DC, about the commencement of commercial production on 06/06/2008(Page no.63 of PB Vol.I)
(d) Green card No.1052(Page nos.319-320 PB Vol.II) 81 ITA No. 72&85/PNJ/2012
(e) Chartered Accountant's report on Form NO.56G(Page nos.13-15 of PB Vol.I)
(f) Details of computation of deduction u/s 10B (Page no.7 of PB Vol.I)
(g) Plant & Machinery -depreciation chart/fixed asset schedule for AYs 2006-07 to 2009-2010(Page Nos.54-55 of PB Vol.I)
(h) Note of the production process of undertaking -submitted vide letter dated 11/05/2012 before CIT(A) (Page nos.21-30 of PB Vol.I)
(i) The consent to Establish received from the Pollution Control Board (Page nos.327 - 332 of PB Vol.II) 39.4 The assessee declared FY:2005-06 since it started the project of setting up of the new unit during FY: 2005-06, as the project started implementation during that year. In this regard reliance was placed in the case of Mettur Chemical & Industrial Corpn. Ltd. Vs CIT (1996) 217 ITR 768 (SC). In this regard, the assessee has given the production data of few years immediately preceding the set up of the new unit for which the attention was drawn to page-272 of the paper book vol.II which are laid down as under;
FY MT(Lacs) FY MT( Lacs)
1999-00 5.04 2003-04 10.86
2000-01 5.84 2004-05 11.49
2001-02 7.13 2005-06 @ 15.98
2002-03 8.21
@ year of transition
FY MT(Lacs FY MT(Lacs)
2005-06@ 15.98 2008-09 31.78
2006-07 10.71 2009-10 38.49
2007-08 21.26 2010-11 32.92
@ year of transition
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39.5 It was submitted that substantial capital was inducted and the
production capacity went up from as low as 1.6 MTPA to 6.00 MTPA in a phased manner during FY: 205-06 itself. The production capacity went up to 2.5 MTPA the major reason for enhancement in FY 2005-06 was the installation of dust suppression system which contained dusting of iron ore in the entire plant, thus, paving the way for full utilisation of the production capacity (lumpy ore) and by 2008-09 the capacity increased to 6 MTPA. Since the process of setting up a new unit was started in 2005-06 and therefore, this year has taken to be the initial year. In which the benefit u/s 10B was the immediate one and this year was declared in the application filed before the authorities for the EOU. There was no intention to avail of maximum benefit. It was also stated that production before setting up of the plant during 2002-03 was different and production process is given at page 393 of the paper book. The details of the major machinery and equipment employed/used in the said unit in the old as well as in the new plant during 2002-03 are given at page-385 of the paper book, vol.I. No crude or processed ore was purchased from anyone in this unit and for this attention was drawn to page-392 of the paper book. Ore costing Rs.20,27,01,4548/- was processed/produced in Chitradurga Unit only out of the ore extracted by the assessee from own mines which are declared in the head „cost of production‟. In the computation of exemption claimed u/s 10B for this unit.
39.6 The beneficiation plant mainly consists of various types of conveyors and screens which are fitted on huge steel structures, whereas the specialised items of plant & machinery are comparatively few in terms of physical quantity and size. Thus, usable steel from the dismantled plant was also re-used along with fresh steel purchases and the fabrication charges were incurred on the same in setting up of the new unit. A summary year wise amounts and related bills submitted before the authorities was given as under;
FY Total Before Before Before Balance
Amount AO CIT(A) ITAT
2005-06 93,84,634 NiL 54,65,761 29,70,530 948,342
2006-07 35,67,255 Nil 713,988 27,87,493 65,775
2007-08 7,03,82,157 Nil 3,47.26,031 3,51,87,107 469,019
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2008-09 8,33,34,046 Nil 4,09,05,780 4,09,45,130 14,83,136
In this regard, attention was drawn to additional paper book page nos. 1436 to 1472 and 1147 to 1355.
39.7 The learned AR carried us to the order of the CIT(A) and discussed in detail the various observation of the CIT(A) which were filed as synopsis on the direction of the Bench, as under;
" At page-54 as per CIT(A): Initial year of new unit is FY: 2005-06 There is categorical noting by the CIT(A) that the assessee had started implementing the project in a phased manner and FY: 2005-06 being the first year of implementation, hence that year was adopted as the initial year or base year of set up of the new unit.
Appellant‟s explanation This consolidates the declaration of FY: 25005-06 being the first year of the new unit made by the assessee and there is no dispute about it.
At page-55 as per CIT(A): only few machines were replaced.
The CIT(A) has opted to disregard that the main or most critical machine, i.e. screening machines were imported and also brought in new technology. The dust suppression system was bought and installed in FY 2005-06 which made it possible to tap the full capacity.
Appellant‟s explanation Banana screen (M/s Schenck Process India Ltd, ) new Vibrating screens and Hydrocone Crusher, (M/s Sandvik SRP AB), which are the backbone of any iron ore processing plant were all new and having the latest technology.
- Dust suppression system was installed in FY: 2005-06 itself (M/s Sathu Engg.) 84 ITA No. 72&85/PNJ/2012
- Besides Pedestral Breaker System was also introduced in FY: 2008- 09 (M/s Tollers Bentono)
- New Conveyor Belts were also brought in
- Only fees Hopper, Primary Jaw Crushers and some conveyors belts were used out of old plant with certain modifications.
At page 58 as per CIT(A) vide para 11.3: The assessee claimed that the entire plant was demolished in the FY 2005-06 itself. The CIT(A) has averred that as per the assessee the entire plant was demolished in the FY 2005-06 itself. But except for a bill of M/s Bhella Constructions containing an expenditure of Rs.3.522 towards demolition or dismantling of the old plant no other evidence has been furnished in this regard.
Appellant‟s explanation;
However, it is categorically submitted that nowhere such point was made by the assessee. Admittedly, it was a renovation project carving out new unit done in a phased manner spread over 4 long years. Thus, there was no question of demolishing the entire plant in one go. It must be appreciated that due to advancements in science and technology all across, nowadays, Metro can be laid out without disrupting the traffic in the concerned area even for a day.
As far as the bill of M/s Bhella Constructions is concerned (page nos. 1443- 1445 of additional PB Vol.III) it is explained that the CIT(A) picked up just one item sl.No.7 of Rs.3,522/- in the said bill which he found as directly attributable to the dismantling work. Whereas the said bill clearly shows two other items also for charges towards the dismantling work of Rs.65.3346/- and Rs.79,060/- at Sl.Nos,.13 & 14 respectively, which had been made towards dismantling of structural steel and crusher hopper respectively. Thus, not only does the charge of CIT(A) get demolished on facts, but even the explanation of the assessee gets proved from the said bill itself that the old crusher hopper had been completely dismantled. Moreover, major portion of the expenditure incurred in expansion constituted of erection and 85 ITA No. 72&85/PNJ/2012 installation of the steel structures on which equipments like conveyors, crushers and screen were fitted and therefore, wherever steel from the old structure was found not in re-cyclable condition, it was given away to those fabricators only after adjusting its scrap price from their fabrication charges. Furthermore, such scrap was also sold to scrap dealers and the relevant income was disclosed separately in the profit & loss account for the years ended on 31/03/2006, 31/3/2007 and 31/3/2008 (page nos.1365 - 1377 of Addl. PB Vol.II) Thus, proving that the old plant was indeed dismantled in those years.
As per CIT(A) vide para-11.3: Expenses claimed as capital were found to be revenue in nature.
Bills of Sathu Engg. and Bhella Construction were found to be for undertaking fabrication, erection and other works. Therefore, these expenses were not capital in nature and appeared to be in the nature of repairs to the existing steel structure.
Appellant‟s explanation It must be appreciated that the beneficiation plant mainly consists of various types of conveyors and screens which are fitted on huge steel structures. Thus, admittedly, the usable steel by only salvaged from the dismantled plant was also re-used in setting up of the new and for which the fabrication charges etc., were paid o the said parties.
Moreover, if the impugned bills did pertain to ordinary repairs, as averted by the CIT(A) then the same could have been easily booked in repairs accounts by the assessee and would have been fully allowed to it.
Most importantly, the assessments for the AY: 2006-07 and 2007-08 had also been framed u/s 143(3) of the Act where the depreciation vis- a-vis capital expenditure (fixed assets) had been examined the respective AOs and even disallowances were made out of the same in some cases. (Reference is drawn the relevant pages of the said assessment orders given at page nos. 16 & 41 of Addl. PB-I). But in no case, addition to plant & machinery was ever disturbed and no 86 ITA No. 72&85/PNJ/2012 adverse comment was ever made in respect thereto by the AO. Thus, the same stands accepted in scrutiny of the department. Accordingly, it is submitted that the CIT(A) had no authority to travel back to those earlier years to hold otherwise that the impugned bills showed that the related expenditure was in the nature of repairs. This was beyond the jurisdiction of the CIT(A) and therefore, the said finding is perverse and has no legal footing.
At page 67 as per CIT(A) vide para 11.7: Production data shows that it increased without investment in plant & machinery.
Production increased from 5.4 metric tons in the year 1999-2000 to 11.49 metric tons in the year 2004-05 without any investment in plant & machinery. Similarly, the production increased from 10.71 metric tons in the year 2006-07 to 21.26 metric tons in the year 2007-08 without any investment in plant & machinery during the year 2007-08.
Appellant‟s explanation The conclusion drawn by the CIT(A) that without any addition of plant & machinery, production had sizably increased in the year 2004-05 from that in the year 1999-2000 and asserting that therefore, in the later years increase in production could not be attributed to installation of new plant & machinery is totally misplaced. CIT(A) has ignored the basic fact that the Chitradurga Plant had the existing production capacity of 1.6 Million tons per annum (or 16 lakh MTPA) before expansion started in the FY 2005-06 and the said increase in production from 5.4 lakh MT in 1999-2000 to 11.49 lakh MT was very much within the existing production capacity of 16 lakh MTPA in those years.
It is reiterated that after expansion (which started in the FY 2005-06) the said production capacity was increased from 1.6 MTPA (or 16 lakh MTPA) in terms of „Lumps‟ to 2.5 MTPA (or 25 lakh MTPA) expressed in terms of „Lumps‟.
Lumps and fines are two different varieties of iron ore. Whereas „lump‟ iron ore is defined as between 6mm and 30mm in size, anything below 87 ITA No. 72&85/PNJ/2012 6mm is considered fins. Lumps fetch a higher price than fines. The reason lump is preferred is that when it is fed into a blast furnace for steel making, its particle size allows oxygen or air to circulate around the raw materials and melt them efficiently. The fine iron ore products have first to be processed into what is called sinter, otherwise it will effectively, smother the air flow in the blast furnace.
In fact, it was only after the assessee installed a dust suppression system in FY 2005-06 that is managed to increase the production of fines in a substantial manner which was getting practically wasted to that, as a result the overall production of lumps and fines increased up to 38 to 49 lakh metric tons i.e., even beyond the installed capacity of 25 lakh metric tons expressed in terms of lumps.
It is undisputed that the substantial expansion for this unit started in the FY 2005-06 in a phased manner spread over the years. There was some increase in production achieved due to partial expansion in the FY 2005-06 itself, but the real outcome of the said expansion in terms of production surfaced in the year in which it was completed i.e., in the FY 2008-09 (AY 2009-10) when production increased to 31.78 lakh MT.
As far as the second averment of the CIT(A) is concerned that even when no investment had been made in plant & machinery in the year 2007-08, production in that year increased to 21.26 MT from 10.71 MT in the preceding year, it must be appreciated that the plant was partially closed in the year 2006-07 due to the fact that substantial expansion was underway in that year and therefore, production in that year as just 10.71 lakh MT which, as a consequence of the said expansion, grew up to 21.26 lakh MT in the following year i.e., 2007-
08. There is nothing unusual about it. Moreover, it is not understood how production can increase is on a large scale. Therefore, no parity can be drawn between investment in plant & machinery in the year 2007-08 and the production level achieved in that very year as has been attempted by the CIT(A).
At page 68 as per CIT(A): No major plant & machinery installed.
88ITA No. 72&85/PNJ/2012 The CIT(A) has asserted that except for a few items like vibrating screen and hydrocone crusher, no other major equipment or machine was installed during the period which could have helped in increasing the production capacity.
Appellant‟s explanation It has already been explained at length that the basic cost of plant and machinery in case of an iron ore beneficiation plant is incurred on raising steel and concrete structures on which the conveyor belts, crushers, screens and other such equipments are installed. The CIT(A) has overlooked the basic composition of production apparatus required in an iron ore beneficiation plant and made the above naive assertion in a casual manner without any real understanding of the actual production mechanism involved. In fact, in Karnataka, there are many plants which are known as Mobile Screening Plant (MSP). The major machinery in such iron ore plant is screening only. Thus, no adverse cognizance of the said assertion of CIT(A) which at best just a casual remark, can be taken in any manner.
At page 79 as per CIT(A) vide para 14: No material change in the input and the output of the unit, which essentially remains as iron ore.
Appellant‟s explanation This observation is patently wrong. The input is crude ore whereas the output is lumps and fines. Not only the physical appearance is absolutely different but even the commercial name and usage are both far-far different. There is practically no use of crude ore, but the usage of lumps and fines is absolutely essential for steel making industry. It seems that the CIT(A) got misled by the loose usage of the term „iron ore‟ without verifying the actual facts.
Moreover, during the course of hearing, before the Hon‟ble ITAT, the assessee-company showed samples of the input in the form of crude ore and the output in the form of iron ore fines and lumps. The activity was explained in detail which encompass transportation of crude ore, 89 ITA No. 72&85/PNJ/2012 crushing, screening and washing, stacking, loading in barges, river transportation to the port and export in ships.
The assessee has also mentioned that it would be willing to show the nature of activity inviting the Hon‟ble Members for a site visit in order to have on the spot understanding of factual matters. It was requested that though the claim was made u/s 10B in respect its three units Amona, Chitradurg and Gadia Sado (Codli) but considering the non- feasible to inspect all the three units, the nearest unit, Amona 100% EOU may be taken up for the site visit. The Hon‟ble Members asked the Departmental Representative also to accompany the site visit. Accordingly, a site visit to Amona unit was arranged for the Hon‟ble Members on 19-12-2012 in the afternoon. From the tax department the Standing Counsel. JCIT, ACIT and inspectors together with ITAT Bench Clerk accompanied the Hon‟ble Members for site visit. The activity was explained on sight to the invite in a details manner.
Appellants‟ explanation The judgment in CIT Vs Sesa Goa Ltd., (2004) 271 ITR 331 was delivered by the Hon‟ble Supreme Court in assessee‟s own case. The facts were that the assessee owned transport vehicles like dumpers, etc. which were employed in conveying crude ore from its mines to the beneficiation plant for processing and thus, declared as plant and machinery. It was explained that instead of installing the conventional conveyor belt system from the mines to the beneficiation plant for conveying crude ore, the assessee had chosen the cost effective way of conveying it through an on-wheel conveying system i.e. through dumpers etc., and which machines did not have any other use. Therefore, for all practical purposes these were not vehicles as understood in the ordinary sense, but plant and machinery in the case of the assessee. Accordingly, the assessee claimed investment allowance u/s 32A on the said assets, but it was disallowed by the assessing authority under the averment that those assets had not been used in the manufacturing process. After passing through the course of appellate proceedings before the CIT(A) and the ITAT the matter travelled to the High Court. The Hon‟ble Panaji Bench of the High 90 ITA No. 72&85/PNJ/2012 Court of Bombay, while answering the question „Whether on the facts and circumstances of the case, the ITAT was justified in holding that the assessee is entitled to deduction of investment allowance u/s 32A of the IT Act, 1961 in respect of machinery used in mining activity. Ignoring the fact that the assessee is engaged in extraction and processing of iron ore not amounting to manufacture or production of any article or thing held as under (266 ITR 126).....
At the end of last but one para of the order.... The Act also contains internal evidence to show that the legislature has treated raw ore differently from processed ore. A Division Bench of this court in CIT Vs Emirates commercial Bank Ltd., (2003) 262 ITR 55 has given the benefit even in respect of data processing done on computers. In other words, the legislation being a beneficial piece of legislation, an expanded meaning should be so given and has to be given...' Thus, the Hon‟ble Bombay High Court ratified the position that raw ore was different from processed ore. Further, while agreeing with the decision reached on 262 ITR 55 (supra) in respect of the data processing that the same amounted to production, it has basically decided that the processing of iron ore also amounts to production following the same analogy. It can be so concluded since the data processing on computers does not involve extraction of an article or thing from earth, and, therefore, the reliance of the said judgment here can only be in respect of processing of the ore and not extraction of the ore.
Further, in the last para of their order, the Hon‟ble Bombay High Court held..... "The ore has to be extracted or raised from the earth in which it is embedded ad has to be brought to the surface. What is brought to the surface is something new which comes into existence as an article or thing. If that be the case, winning or extracting of ore would fall within the expression ‗production'.‖.
Thus, on the question put before the Hon‟ble High Court whether extraction and processing of iron ore amounted to manufacture or production, it decided that processing of ore was production and also that extraction of ore was also production‟. However, the department preferred further appeal before the Hon‟ble Supreme Court, where the same question as put before the High Court was re-examined by the Apex Court. The Apex Court held as under (271 ITR 331)....
91ITA No. 72&85/PNJ/2012 The reasoning given by the High Court, in the decisions noted by us earlier, is in our opinion, unimpeachable. This court had, as early as in 1961 in Chrestian Mica Industries Ltd. Vs State of Bihar (1961) 12 STC 150 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 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, product of human activity or effort. From 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. It has also been held by this court in CIT Vs N.C. Budharaja & Co., (1993) 204 ITR 412 that the word production is much wider than the word ‗manufacture'.
"We are therefore, of the opinion that extraction and processing of iron ore amounts to production within the meaning of the word in section 32A(2)(b)(iii) of the Act and consequently, the assessee is entitled to the benefit of sec.32A(1) of the Act‖.
It must be appreciated that he Apex Court categorically expressed that the reasoning given by the High Court on the meaning of word production as unimpeachable in its opinion, and since a common phase „extraction and processing of iron ore‟ had been employed in the question. It was also answered in the singular manner only by the Apex Court. However, what must be understood is that the Hon‟ble High Court in 266 ITR 126 nowhere held that both extraction and processing of ore shall have to be undertaken together to constitute production. Therefore, it cannot be understood that the Apex Court decided the issue in any different manner and it must be safely concluded that extraction of iron ore and processing of iron ore were independently held as production. Accordingly, the assertion of the department that extraction and processing should both be undertaken together in order to pass the test of production is just misgiving and against the spirit of the above decisions of the Hon‟ble Bombay High Court and the Supreme Court.
Furthermore, even in the case of Chowgule & Co., Ltd., relied upon by the department, it must be appreciated the order dated 12/07/2007 of the Hon‟ble Panaji Bench of ITAT in ITA No.162/PNJ/2006 was immediately rectified by the same Bench in Misc. Appn. moved by the assessee in MA.NO.23/PNJ/2007 order dated 19/7/2007 where it was 92 ITA No. 72&85/PNJ/2012 finally held; We hold that the assessee-company itself is extracting the entire iron ores and thereafter processing the same, and therefore, entitled for the deduction u/s 10B as held by the Supreme Court in the case of Sesa Goa.
The need for rectification arose since in the original order the Hon‟ble ITAT had held that the asesssee was only processing iron ore but was not extracting the ore (Pl. See para-5 order dated 19/7/2007 in MA), but the Hon‟ble ITAT found during the MA proceedings (in the light of sub-para 8 in para-4 of order dated 19/07/2007) that the assessee- company was extracting as well as processing the ore, and therefore, 10B deduction was allowed to the assessee company.
It must be understood that EOU and assessee have different meaning. It is not necessary that both the extraction of iron ore and processing of iron ore must be carried out by the EOU itself to claim exemption u/s 10B. It must be understood that the mines and processing units are always at a safe distance with each other because mine blasting would otherwise disturb the functioning of the processing units. EOU unit has to be a custom bonded area but the mines are spread over kilometers in area which cannot be made custom bonded. Thus, the mines cannot be mad part of the EOU unit in any manner.
However, even if the extraction of iron ore is carried out by the assessee at mines owned by him or by third party (which cannot be covered under EOU unit as explained above) and only the processing is carried out by EOU unit, even then the assessee will be eligible for 10B deduction for the said EOU as the assessee is extracting as well as processing the ore. This is the decision of the Chowgule because in that case the EOU was using the iron ore extracted by the said company from its own mines and from the mines of Antao Brothers which could not be part of the EOU unit of that assessee is any manner as explained above.
Thus, the basic condition for allowing exemption u/s 10B by holding h extraction and processing of iron ore as production is that the assessee should carry on both these activities by itself. and it cannot 93 ITA No. 72&85/PNJ/2012 be understood to mean that both these activities should be carried on by the EOU itself.
In other words the Hon‟ble ITAT did not hold that a EOU qualifying for deduction u/s 10B must undertake both these activities together, rather it was held that if the assessee extracted the ore by itself and also undertook processing of the ore as its EOU, it would qualify for deduction u/s 10B for its ore processing EOU.
In the present case of the assessee also, there is no dispute that the assessee-company namely M/s Sesa Goa Ltd., also undertook both the activities of extraction and processing and has correctly claimed the deduction u/s 10B in respect of profits arising from processing of ore at its EOUs. Thus, the parameters laid down in the above case of Chowgule & Co., by the Hon‟ble ITAT are squarely met by the assessee.
At page-89 as per CIT(A) vide para 16: For determining the percentage of old equipments used in the new unit, even the assets held at the extracting unit must be taken into consideration. The CIT(A) has asserted that to determine the percentage of the old machine reused in the new set up it is necessary to take into consideration all the old and existing machines of the respective units along with the plant and machinery deployed in the mines of the assessee. He has further averted that if the value of plant and machinery employed in the mines of the company are taken into consideration, then the percentage of old machine will certainly be exceeding the threshold limit of 20% as prescribed. The CIT(A) has justified his averments by relying on his interpretation of the judgment of the Hon‟ble Supreme Court in CIT Vs Sesa Goa Ltd., (2004) 271 ITR 331 that the activities to be eligible to be held as „Production‟ should comprise of the extraction as well as the processing of iron ore.
Appellant‟s explanation The assessee has claimed deduction u/s 10B in respect of its beneficiation units only and not the mines. Therefore, there is no rationale in clubbing the machines employed at the mines with those 94 ITA No. 72&85/PNJ/2012 owned by the units for the purpose of calculating the percentage of old equipments used in the new unit. Further, the CIT(A)‟s assertion that if the value of plant and machinery employed in the mines of the company are taken into consideration, then the percentage of old machine will certainly be exceeding the threshold limit of 20% as prescribed, is nothing but presumptuous. Moreover, it has already been explained that in Hon‟ble Supreme Court judgment in 271 ITR 331 read with Bombay High Court‟s ruling in 266 ITR 126 in the case of Sesa Goa it has actually decided that extraction of ore and processing of ore are independently held as production‟.
Codli Unit
40. The assessee claimed exemption u/s 10B in respect of Codli Plant at Rs.87052701/-. The assessee for making use of dumps (waste / tailings left out of normal iron ore for process) established this plant. The commercial production started on 8.3.2000. An application to SIA DIPP, Ministry of Industry was moved in 1997 to accord EOU status for such plant vide letter dated 15.8.1997. In the application assessee stated the raw material cost as raw material used in the wastage of other plants (pg 376) PB. This plant produces Ultra Fine Recovery. This plant was approved vide approval No. PER303(1997)EOB/318/97 dated 27.10.1997 as EOU plant (pgs.32-37 PB). The Ministry of Industry vide letter dated 9.2.2000 was informed about the start of commercial production on 8.3.2000, after the expiry of 5 years, the earlier approval vide letter dated 3.4.2005 to continue EOU for a further period of 5 years (pg.60-61 PB). The assessee company availed of benefit u/s 80HHC up to assessment year 2004-05. No claim was made u/s 10B in assessment year 2005-06 in the return of income, the claim was made by way of letter during assessment proceedings u/s 143(3) which was allowed by AO and the matter is pending on legality before the Hon‟ble High Court. For the assessment year 2006-07 & 2007-08 the AO allowed the claim u/s 10B after examining the claim for these assessments and the assessments were re-opened u/s 263 of the IT Act, after the claim for the impugned assessment year is rejected by the AO. Holding that the claim allowed u/s 10B by the AO was erroneous in so far as prejudicial to the interest of revenue. During the 95 ITA No. 72&85/PNJ/2012 impugned assessment year, the AO disallowed the claim. Here also a survey was conducted at site on 26.12.2011. During the survey, the statement of GM Mr. Joseph Cohello (pg.nos.722 to 727) was recorded, but no new facts were brought. Even the AO did not mention about the survey of the statement recorded during the survey. Our attention was drawn towards the statement to know about the process employed by the assessee.
40.1 On the objection of the AO that the said unit is not engaged in any manufacture or production or any article or thing. It was contended that the AO and the CIT(A) could not understand the process involved in the unit. This EOU employs the process and machinery which are different from other processing plant. What is fed as input in the plant is tailings, which is the waste material obtained from other normal processing and from this „iron ore‟ is extracted as output. The input is merely is a waste and has cost practically all the characteristic of iron ore and cannot be considered as „iron ore‟ extracted from the mines. From this waste material what is extracted is called the iron ore which has the utility and marketability. The waste, as such does not have any commercial marketability. It was contended that the decision of M/s Sesa Goa Ltd., (271 ITR 331) has wrongly been interpreted by the revenue. Reliance was placed for the preposition of the law that the said unit is engaged manufacturing or production of an article or thing on the same decision which has been relied on in respect of similar issue arising in other two units.
40.2 On the objection of the AO that the assessee has not maintained separate books of accounts for EOU units and non-EOU units submissions made in respect of other units were reiterated.
40.3 On the objection of the AO that no satisfactory evidence was produced by the assessee about the date of manufacturing or production. It was submitted that the assessee submitted that the approval dated 27.10.1997 (pg.33-37 PB). In the approval one of the conditions was that the assessee has to implement the project and commence commercial production within 3 years and had to intimate this to Ministry. The assessee accordingly, 96 ITA No. 72&85/PNJ/2012 intimated the Ministry vide its letter dated 9.3.2000 i.e., commercial production started on 8.3.2000.
40.4 On the objection of the AO that setting up of a unit on the old mines which are already operated by the assessee cannot be treated as new unit. It was contended that Sec.10B nowhere prohibits the assessee to set up the unit by itself was new and is engaged in the manufacture or production activity. The activities carried in the old mines are totally different from the activity contemplated in the unit.
40.5 On the contention of the AO that the fresh approval of the Board is not available to the unit, it was submitted that the assessee has obtained the renewal of earlier approval duly ratified by the Board of Approval. For this, attention was drawn to pages (436 to 439 PB) which contains copy of the letter dated 13.7.2012 received from the Development Commissioner and also copy of the letter dated 1.8.2012 was also submitted that during the course of hearing confirming the approval of Board of Approvals was not required for renewal granted for continuation as an EOU for further period of 5 years in terms of para 6.6 of foreign trade policy. This letter was duly verified by us and copy of the same was also given to the DR. On the contention that the unit has not debited any cost of the waste material used, it was submitted that the waste was used from tailings/ponds which had neither any cost nor any commercial marketability. Attention was also drawn to page-376 of paper book to stress that these facts were duly mentioned in the EOU application submitted with the SIA/DIPP and was duly shared with the AO. Some piece of tailing was physically produced at the time of hearing before the Hon‟ble Bench.
40.6 The learned AR carried us to the order of the CIT(A) and the various observations made by him and contended and stated how these observations are not correct. On our permission, he submitted the synopsis in the following manner;
"Point-wise response to the observations of CIT(A) in his order;97
ITA No. 72&85/PNJ/2012 2.1 At page -103 as per CIT (A) vide para 20: What is fed as raw material to the Codli unit is iron ore and what comes out after processing is also iron ore, the only minor difference being in the iron content of the material.
Appellant's Explanation:
CIT(A) has not understood is that the input for this plant is 'tailings', which is the waste material obtained from other normal processing and from this 'iron ore' is extracted as output. So, what goes in as input is 'tailings' and what comes out is the 'iron ore'.
In fact, CIT(A) has made a contradictory statement to his above averment at page no. 107 of his order, where he has asserted that 'having lost all the characteristics of iron ore the tailings can never be considered as iron ore extracted from the mines and therefore, recycling of such waste materials cannot be considered to be the same as processing of extracted iron ore.' This assertion rather proves the stand of the appellant that the output of Codli unit is a "new" product having different characteristics and use.
2.2 At Page 105 as per CIT(A) vide para 21: The unit is not engaged in any manufacturing or production of article or thing since the unit is not engaged in 'extraction and processing of iron ore', which together constitutes 'production', as interpreted by the Supreme Court in Sesa Goa 271 ITR 331.
Appellant's Explanation:
The judgment in CIT Vs. Sesa Goa Ltd. (2004) 271 ITR 331 was delivered by the Hon'ble Supreme Court in assessee's own case. The facts were that the assessee owned transport vehicles like dumpers, etc. which were employed in conveying crude ore from its mines to the beneficiation plant for processing and, thus, declared as 'plant and machinery'. It was explained that instead of installing the conventional conveyor belt system from the mines to the beneficiation plant for conveying crude ore, the assessee had chosen the cost effective way of conveying it through an on-wheel conveying system, i.e., through dumpers, etc. and which machines did not have any other use. Therefore, 98 ITA No. 72&85/PNJ/2012 for all practical purposes these were not 'vehicles' as understood in the ordinary sense, but 'plant and machinery' in the case of the assessee. Accordingly, the assessee claimed investment allowance u/s 32A on the said assets, but it was disallowed by the assessing authority under the averment that those assets had not been used in the manufacturing process. After passing through the course of appellate proceedings before the CIT (Appeals) and IT AT, the matter traveled to the High Court. The Hon'ble Panaji Bench of the High Court of Bombay, while answering the question "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the assessee is entitled to deduction of investment allowance under section 32A of the Income-tax Act, 1961, in respect of machinery used in mining activity, ignoring the fact that the assessee is engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing?", held as under [266 ITR 126]:
At the end of last but one para of the order: "... The Act also contains internal evidence to show that the Legislature has treated raw ore differently from processed ore. A division Bench of this court in CIT Vs. Emirates Commercial Bank Ltd. (2003) 262 ITR 55, has given the benefit even in respect of data processing done on computers. In other words, the legislation being a beneficial piece of legislation, an expanded meaning should be so given and has to be given. "
Thus, the Hon'ble Bombay High Court ratified the position that raw ore was different from processed ore. Further, while agreeing with the decision reached in 262 ITR 55 (supra) in respect of data processing that the same amounted to 'production', it has basically decided that the 'processing' of iron ore also amounts to 'production' following the same analogy. It can be so concluded since the data processing on computers does not involve 'extraction' of any article or thing from earth, and, therefore, the reliance of the said judgment here can only be in respect of 'processing' of the ore and not 'extraction' of the ore.
Further, in the last para of their order, the Hon'ble Bombay High Court held: "The ore has to be extracted or raised from the earth in which it is 99 ITA No. 72&85/PNJ/2012 embedded and has to be brought to the surface. What is brought to the surface is something new which comes into existence, as an article or thing. If that be the case, winning or extracting of ore would fall within the expression "production ".
Thus, on the question put before the Hon'ble High Court "whether 'extraction and processing' of iron ore amounted to 'manufacture or r production'", it decided that 'processing of ore' was 'production' and also that 'extraction of ore' was also 'production'.
However, the department preferred further appeal before the Hon'ble Supreme Court, where the same question as put before the High Court was re-examined by the apex court. The Apex Court held as under [271 ITR 331]:
"The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This court had, as early as in 1961, in Chrestian Mica Industries Ltd. Vs. State of Bihar [1961] 12 STC 150, 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 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". From 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. It has also been held by this court in CIT Vs. N.C. Budharaja and Co. [1993] 204ITR 412 that the word "production" is much wider than the word "manufacture".
"We are, therefore, of the opinion that extraction and processing of iron ore amounts to "production" within the meaning of the word in section 32A(2)(b)(iii) of the Act and, consequently, the assessee is entitled to the benefit of section 32A(l) of the Act."
It must be appreciated that the Apex Court categorically expressed that the reasoning given by the High Court on the meaning of word 100 ITA No. 72&85/PNJ/2012 'production' was unimpeachable in its opinion; and since a common phrase - 'extraction and processing of iron ore' had been employed in the question, it was also answered in the singular manner only by the Apex Court. However, what must be understood is that the Hon'ble High Court in 266 ITR 126 nowhere held that both 'extraction and processing' of ore shall have to be undertaken together to constitute 'production'. Therefore, it cannot be understood that the Apex Court decided the issue in any different manner, and it must be safely concluded that 'extraction of iron ore' and 'processing of iron ore' were independently held as 'production'. Accordingly, the assertion of the department that 'extraction and processing' should both be undertaken together in order to pass the test of 'production' is just a misgiving and against the spirit of the above decisions of the Hon'ble Bombay High Court and the Supreme Court.
Furthermore, even in the case of Chowgule & Co. Ltd., relied upon by the department, it must be appreciated the order dated 12/07/07 of the Hon'ble Panaji Bench of ITAT in ITA No. 162/PNJ/2006 was immediately rectified by the same bench in Miscellaneous Application moved by the assessee in M.A. No. 23/PNJ/2007 order dated 19/07/07 where it was finally held: "We hold that the assessee-companv itself is extracting the entire iron ores and thereafter processing the same, and, therefore, entitled for the deduction u/s 10B as held by the Supreme Court in the case of Sesa Goa."
The need for rectification arose since in the original order the Hon'ble ITAT had held that the assessee was only 'processing' iron ore but was not 'extracting' the ore (Please see para 5 of order dated 19/07/07 in MA). But the Hon'ble ITAT found during the MA proceedings (in the light of sub-para 8 in para 4 of order dated 19/07/07) that the assessee-company was extracting as well as processing the ore, and, therefore, 10B deduction was allowed to the assessee-company.
It must be understood that 'EOU' and 'assessee' have different meaning. It is not necessary that both the extraction of iron ore and processing of iron ore must be carried out by the EOU itself to claim exemption u/s 10B. It must be understood that the mines and processing units are 101 ITA No. 72&85/PNJ/2012 always at a safe distance with each other because mine blasting would otherwise disturb the functioning of the processing units. EOU unit has to be a custom bonded area but the mines are spread over kilometres in area which cannot be made custom bonded. Thus, the mines cannot be made part of the EOU unit in any manner.
However, even if the extraction of iron ore is carried out by the assessee at mines owned by him or by third party (which cannot be covered under EOU unit as explained above) and only the processing is carried out by EOU unit, even then the assessee will be eligible for 10B deduction for the said EOU as the assessee is extracting as well as processing the ore. This is the decision of the Chowgule because in that case the EOU was using the iron ore extracted by the said company from its own mines and from the mines of Antao Brothers, which could not be a part of the EOU unit of that assessee in any manner as explained above.
Thus, the basic condition for allowing exemption u/s I0B by holding the 'extraction' and processing of iron ore' as 'production' is that the assessee should carry on both these activities by itself; and it cannot be understood to mean that both these activities should be carried on by the EOU itself. In other words the Hon'ble ITAT did not hold that a 'EOU' qualifying for deduction u/s 10B must undertake both these activities together, rather it was held that if the assessee extracted the ore by itself and also undertook processing of the ore at its EOU, it would qualify for deduction u/s 10B for its 'ore processing' EOU.
In the present case of the appellant also, there is no dispute that the assessee-company, namely M/s Sesa Goa Ltd., also undertook both the activities of extraction and processing and has correctly claimed the deduction u/s 10B in respect of profits arising from 'processing' of ore at its EOUs. Thus, the parameters laid down in the above case of Chowgule & Co. by the Hon'ble ITAT are squarely met by the appellant.
2.3 At Page 109-110 as per CIT(A) vide para 21.4: There is a limited discussion on "Tata Tea" case for alternate argument of appellant that in case of EOU, regard to be given to the EXIM policy.
102ITA No. 72&85/PNJ/2012 Appellant's Explanation:
Reference is invited to the judgments in Tata Tea Ltd. Vs. ACIT (2011) 338 ITR 285 (Ker.) and Madhu Jayanti International Ltd. Vs. DCIT (Kol. ITAT)(SB). In case of an EOU, regard has to be given to the definition of manufacture contained in the relevant EXIM policy. Even if definition of "manufacture" has been inserted in the Income-tax Act, it is submitted that it would not deter to draw the definition of production from EXIM policy. Since it is settled law that production is wider than manufacture and every case of manufacture can be included in Production, hence the definition given in EXIM policy for "manufacture" would stand good for the word "Production" [Please refer to Page Nos. 174-179 of (Initial) PB Vol. (I) 2.4 At Page 112 as per CIT( A) vide para 22: The assessee-company has not produced any satisfactory evidence with regard to date / year of commencement of business of the unit.
Appellant's Explanation:
The above averment has been made without checking from the record that a copy of letter furnished to SIA, DIPP (as well as custom department) had been furnished by the appellant. These letters were duly acknowledged by respective authorities. There is no mention or discussion what other evidence could be produced or as to how the evidence produced was lacking merit of consideration or reliance.
2.5 At Page 113 as per CIT(A) vide para 23: The assessee-company has not been able to furnish any evidence to show that the approval issued by the Development Commissioner was subsequently ratified by the Board.
Appellant's Explanation:
A copy of the Letter dt. 13/07/12 received from the Development Commissioner, SEEPZ, Mumbai confirming the Board's Approval [Page Nos. 436-439 of (Initial) PB Vol. II] was furnished. Another copy of the Letter dt. 01/08/2012 received from the Development Commissioner, SEEPZ, Mumbai confirming that the approval of the Board of Approvals was not required for the renewal granted for continuation as an EOU for further 103 ITA No. 72&85/PNJ/2012 period of 5 years in terms of para 6.6(a) of Foreign Trade Policy. (This document was submitted during ITAT hearing).
2.6 At age 114 as per CUT A) vide para 23: It is settled principle of tax jurisprudence that the provisions regarding exemptions and concessions need to be construed strictly in accordance with the written language of the statute.
Appellant's Explanation:
There is no doubt in the above observation of the CIT(A), but it should be applied in all cases. No reference has been made by the CIT(A) to BajajTempo (SC) and several such other rulings where it is held that once a claim is found basically bonafide, the procedural aspects be looked at liberally in the matter relating to incentive / exemption provisions of the Act.
3. Reply to pertinent averments raised in PR's Rejoinder (other than those already explained herein above) 3.1 Vide para 3b (page 7) of DR's PB Vol-II It is averred that the assessee did not include any amount towards cost of iron ore input to its Codli, Amona and Chitradurga units. If the said cost is taken into account, then there would be loss in all these units and deduction u/s 1 OB would be nil.
Appellant's Explanation:
This averment does not bear out from the facts. The assessee had declared 'cost of production' in the computation sheets of deduction claimed u/s 10B in respect of each EOU submitted during the assessment proceedings along with details of EOU-wise break-up of the 'cost of production'. A copy of the same was also furnished before the Hon'ble Bench on 20/12/12. It is also reproduced herein below:
Amona Unit Amount (Rs.)
104
ITA No. 72&85/PNJ/2012
Ore Mining Cost (Ore Input Cost from own mines in Goa) 45,25,03,692 Ore Dressing Cost 10,46,39,225 Total (as per 10B Computation Sheet): 55,71,42,917 Chitradurga Unit Ore Mining Cost (Ore Input Cost from own mines in Karnataka) 20,27,01,458 Ore Dressing Cost 6,90,45.428 Total (as per 10B Computation Sheet): 27,17,46.886 Codli Unit Ore Mining Cost @ NIl Ore Dressing Cost 2,49.57.787 Total (as per 10B Computation Sheet): 2, 49, 57,787 @ Raw-material for Codli is 'Tailings' which is a total waste and has no value.
Thus, ore input cost has been duly and correctly declared in the computations for deduction claimed u/s 10B in respect of all three EOUs by the assessee.
3.2 Vide para 3c (page 8) of DR's PB Vol-II It is averred that letter signed by the Executive Assistant to Development Commissioner, SEEPZ SEZ stating that 'renewal granted for communication as an EOU for further period of 5 years from 2006-07 to 2010-11, did not require the approval of the Board of Approvals in respect of Codli unit. But this letter is not signed by the authorized person in accordance with the provisions of the Act.
Appellant's Explanation:
A copy of the impugned Letter dt. 01/08/2012 (...submitted during the hearing in November, 2012 before the Hon'ble IT AT) was indeed signed by the Executive Assistant to the Development Commission, which is a standard practice that such clarificatory letters are released by the EA only under due authority of the Development Commissioner. It must be appreciated that it is not the case where the approval of the Board of Approvals was not signed by the Development Commissioner and, therefore, the same was not to be admitted; it was a case of merely 105 ITA No. 72&85/PNJ/2012 intimating / confirming to the appellant-company that the approval of the Board of Approvals was not required for the renewal granted for continuation as an EOU for further period of 5 years in terms of para 6.6(a) of Foreign Trade Policy.
40.7 Thus, it was contended that there is a change of utility waste in other plant for which there was no customer and it is being dumped was utilized by making the ultra-fine ore. The Learned. A.R. brought out the raw material i.e., the tailing which was in liquid form and also the ultra-fine ore which was in powder form and shown it before the bench during the course of hearing. Thus, he contended that both the things, raw material as well as the ultra-fine ores produced are different and having different utility.
41. The learned DR submitted the following facts in tabular form in respect of all the three units i.e., Amona plant, Chitradurga plant and Codli plant:-
Codli Unit Amona Plant Chitradurga Unit
Commencement of 1973 1958 1952
processing iron ore
Place Panaji, Goa Panaji, Goa Chitradurga,
Karnataka
Acquired by 1978 1985 F.Y. 1998-99
assessee
Renovation process No evidence 2002-03 F.Y. 2005-06 to
2008-09
Investment on plant No evidence ` 93,93,596/-
& machinery &
`3,96,10,020/- ` 35,67,257/-
renovation
` 7,03,82,158/-
Approval - EOU No approval 28.03.2008 15.02.2008
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Ratified by Board No ratification 03.06.2008 14.01.2011
S. 10B claim A.Y.2005-06 A.Y. 2009-10 A.Y. 2009-10
Claim u/s. 10B `8,70,52,701 `257,23,14,771/- `185,34,16,650/-
Section 80IB of the Act claimed in respect of all the three units of Codli, Amona and Chitradurga division of Rs.451,27,84,122/-.
41.1 It was stated that all the three units commenced processing of iron ore in the years 1973, 1958 & 1952. Section 10B of the Act, came under the Statute Book by Finance Act, 1988 w.e.f. 01.04.1989. In the assessment year 2005-06 (Codli unit), assessment year 2009-10 both Amona unit and Chitradurga unit made a claim of deduction u/s.10B of the Act. All the three units as stated above had commenced processing nearly 25 years earlier to the assessment year in which the claim u/s. 10B of the Act was made. Admittedly, the three units under which Section 10B of the Act claim has been made are not new units as contemplated under Section 10B of the Act. Relaxation of the new unit has been subsequently provided in the section by way of amendment only under certain conditions stipulated in the section, which were stated as under:
a. For a period of TEN consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking BEGINS to manufacture or produce article or thing.
[10B(1)]
Previous year in which
Ten consecutive
undertaking began to Unit name
assessment years
produce
1972-1973 Codli 1973-74 to 1982-83
1957-1958 Amona 1958-59 to 1967-68
1951-1952 Chitradurga 1952-53 to 1961-62
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i. The provision clearly mandates that the assessee would be entitled to claim deduction u/s. 10B of the Act from the previous year in which the undertaking begins to manufacture or produce article or thing. Secondly, this claim is providing for a period of ten consecutive assessment years, again, from the date when the undertaking begins to produce or manufacture article or thing. Admittedly, in the facts of the present case the Codli, Amona and Chitradurga units of the assessee have not made a claim from the date of commencement of processing iron ore. Further all the three units have not met the consecutive assessment years contemplated in the Section from the date of commencement of processing iron ore.
ii. The assessee in order to overcome this mandatory provision has projected a new contention that all the three units at Codli, Amona and Chitradurga are new units which have commenced processing of iron ore w.e.f. F.Y. 2004-05, 2002-03 & 2005-06 respectively. In order to substantiate their claim, assessee states that there is addition to the old machinery in these three units which would constitute new units having commenced processing from the respective Financial Years.
iii. Assessee‟s claim: Value addition to plant and machinery .... New unit Name of the unit Date of value Amount of value Claim of new unit addition addition commenced Codli No evidence No evidence F.Y.2004-05 Amona F.Y. 2002-03 `3,96,10,020/- F.Y. 2002-03 Chitradurga F.Y.2005-06 ` 93,93,596/- F.Y. 2005-06 F.Y.2006-07 `35,67,257/-
F.Y. 2008-09 `7,03,82,158/-
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iv. The old unit continuous to function without stopping of processing iron ore even for one year. The only addition made is by virtue of adding a few machineries. This has resulted in increased quantum of processing iron ore in Amona and Chitradurga units. However there is no evidence in this regard in respect of the Codli unit. The addition made to the old machinery cannot be termed as a new undertaking.
v. The judgments relied on by the assessee of the Apex court interpreting of Section 15C of the Income Tax Act 1922, will not be applicable to the facts of the present case as the wordings of Section 10B of the Act and 15C of the Act are not identical. The words "beginning with the assessment years relevant to the previous year in which the undertaking begins to manufacture or produce article or thing", which is prominent and the genesis of Section 10B of the Act is totally absent in Section 15Cof the Act. Hence, the principle enunciated by the Apex court in those judgments cannot be made applicable to the facts of the present case.
vi. In fact, when the legislature has deemed it fit to extent such addition to machinery as a new machinery. It has specifically stated so as in Explanation to Section 80IA of the Act.
Reliance was placed on the following cases;-
1. (2011) 334 ITR 157 (Kar) Sami Labs Ltd., Vs. ACIT
2. SLP(C).No.14937/2011 M/s. Sami Labs Ltd., Vs. ACIT
3. Board Circular No.1 of 2005 dated 06.01.2005
4. (1990) 181 ITR 518 (Kar) CIT vs. Nippon Electronics (India) (P) Ltd.,
5. (1990) STC 270 Falmer Jeans Vs. Rodin b. PROVIDED that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood 109 ITA No. 72&85/PNJ/2012 immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub- section ONLY FOR THE UNEXPIRED PERIOD OF AFORESAID TEN CONSECUTIVE ASSESSMENT YEARS; [1st proviso to Section 10B(1)].
Previous year in Unit name Ten consecutive Unexpired which undertaking assessment years period after began to produce 2000 1972-1973 Codli 1973-74 to 1982-83 Not applicable 1957-1958 Amona 1958-59 to 1967-68 Not applicable 1951-1952 Chitradurga 1952-53 to 1961-62 Not applicable i. Admittedly, assessee had not applied for deduction u/s.10B of the
Act before the Finance Act, 2000. In order to avail of the benefit after substitution of the Finance Act, 2000, assessee should have availed of the benefit u/s.10B of the Act or should be sought for exemption from the Assessing Officer sub-section (8) of section 10B of the Act.
ii. On facts, assessee has neither claimed section 10B of the Act, exemption or sought the permission of the Assessing Officer for exemption from the applicability of section 10B of the Act, prior to Finance Act, 2000.
c. Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment year. (Sub-section (8) of Section 10B) Name of the unit Commencement of Application under sub-
the unit section 8 of Section 10B
Codli 1973 Not filed
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Amona 1958 Not filed
Chitradurga 1952 Not filed
i. Exemption claimed by the assessee can be exempted earlier to Finance Act, 2000 or subsequently only if the assessee files such an application under sub-section (8) of section 10B of the Act.
1. Admittedly, assessee has not filed any such application under sub-section (8) of section 10B of the Act. Therefore the assessee will not be entitled to claim exemption u/s.10B of the Act. The DR relied in the case of Hemalatha Gargya Vs. CIT, A.P. (2003) 9 SCC 510 d. "Relevant assessment years" means any assessment years falling within a period of TEN CONSECUTIVE ASSESSMENT YEARS referred to in this section. [Section 10B Explanation 2(v)].
The claim u/s.10B of the Act can be made:
a. In respect of a new unit.
b. In the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce article or thing.
c. Period of ten consecutive assessment years.
d. Exempted only if assessee applies and is exempted by the Assessing Officer.
Admittedly, the assessee has not satisfied any of these mandatory conditions. Hence assessee is not entitled to the claim u/s.10B of the Act.
e. Deduction of such profits and gains as are derived by a hundred percent export oriented undertaking from the export of articles or things.[10B(1)] The deduction of such profits and gains are substantiated and has to be worked out in accordance with sub-section (4) of section 10B of the Act, which is as under:
111ITA No. 72&85/PNJ/2012 f. For the purpose of sub-section (1), the profits derived from export of articles or things ... shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things ... bears to the total turnover of the business carried on by the undertaking (sub section (4) of section 10B of the Act). i.e., Export turnover in respect of Profits derived Profits of the such articles or things from export of = business of the X Total turnover of the article or things undertaking business carried by the undertaking Admittedly, assessee has not included any amount towards cost of iron ore input to the Codli Unit, Amona Plant and Chitradurga Unit.
The working of the claim made u/s.10B of the Act presented by the assessee would disclose this fact.
Assessee has not included this amount only to booster the profit and claim deduction u/s.10B of the Act. If the cost of the input i.e., iron ore, is taken into account then the assessee would not be earning any profits but would be earning only loss. There will be no claim at all u/s.10B of the Act.
g. "Hundred percent export oriented undertaking" means an undertaking which has been approved as a hundred percent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951) and the Rules made under that Act. (Explanation 2(iv) of Section 10B) Name of Approval Approval by Board whether permitted for the unit as EOU appointed by current assessment Central year 2009-10 Government Codli ---- No approval No approval 112 ITA No. 72&85/PNJ/2012 Amona 28.03.2008 03.06.2008 Approval Chitradurga 15.02.2008 14.01.2011 No approval i. The assessee is bound to obtain the requisite approval in accordance with the Explanation read with section as envisaged above.
ii. Assessee has produced a letter signed by "Executive Assistant to Development Commissioner, SEEPZ SEZ" stating that "renewal granted for communication as an EOU for further period of 5 years from 2006-07 to 2010-11, was not required the approval of Board of Approvals" in respect of Codli Unit. This letter is not signed by the authorized person in accordance with the provisions of the Act.
iii. In respect of Chitradurga Unit no approval for the current Assessment Year 2009-10 has been obtained.
iv. Hence, the assessee does not have the requisite permission to claim benefit u/s.10B of the Act in respect of Codli Unit as well as Chitradurga Unit.
41.2 The learned DR made following written submissions ;- "Conditions stipulated by Section (Sub-section 2 of Section 10B) h. It manufactures or produces any articles or things or computer software. [Section 10B(2)(i)] a. Facts: -
In the Codli unit, Amona Unit as well as Chitradurga Unit, assessee is carrying on the process of feeding iron ore which is grinded, washed of impurity as well as dry blown and the output again is iron ore. Both Assessing Officer as well as Appellate Commissioner examining the facts, find that all the three units are involved in processing of iron ore. The plant and machinery which is situated 113 ITA No. 72&85/PNJ/2012 in the premises of these three units are benefication plants. It is mainly involved in screening of the iron ore which has been fed into the plants by a process involving either dry or wet.
a. Assessee‟s contention Codli unit, Amona Unit and Chitradurga Unit are independent unit carrying on manufacture and production activities of article and thing. Therefore it satisfies the conditions contained in section 10B(2)(i) of the Act.
b. Revenue‟s submission:
Assessee has number of units which carry on independent activities. A series of activity from the extraction of iron ore to its ultimate export is carried on by these various units. The jurisdictional Bombay High Court, (2004) 266 ITR 126 CIT Vs. Sesa Goa Ltd., held "the processes involved in mining ore commencing from extraction of iron ore to selling it for export are identified as under":
(I) Extraction of ore from the mine;
(II) Conveying the ore to the dressing plant;
(III)Washing, screening and dressing the ore;
(IV) Conveying of the ore from the mine site to the riverside; (V) Transport of the ore from the river side to the harbor by means of barges;
(VI) Stacking of the ore at the harbor in different stock piles according to its physical and chemical composition; and (VII) Blending of the ore from different stock piles with a view to producing ore of the required specifications and loading it into the ship by means of the mechanized ore handling plant.
114ITA No. 72&85/PNJ/2012 Whether these processes involve "manufacture" or "production" was concluded by the jurisdictional High Court as under:
c. Manufacture:
It would, therefore, not be possible for us to accept the contention that extractions of ore and the various processes which it undergoes until it is sold amounts to "manufacture". In our opinion, the various processes applied do not amount to "manufacture" and consequently, it would be difficult to hold that the extraction of ore amounts to "manufacture".
d. Production:
i. The ore has to be extracted or raised from the earth in which it is embedded and has to be brought to the surface. What is brought to the surface is something new which comes into existence, as an article or thing. If that be the case, winning or extracting of ore would fall within the expression "production".
ii. The matter was carried to the Apex court. The Apex court in CIT vs. Sesa Goa Ltd., (2004) 271 ITR 331 (SC) has held as under:
iii. "We are, therefore, of the opinion that extraction and processing of iron ore amounts to "production" within the meaning of the word in S.32A(2)(b)(iii) of the Act and, consequently, the assessee is entitled to the benefit of S.32A(1) of the Act. The question whether the High Court was correct in holding that the activity did not amount to "manufacture" is left open."
iv. It should be noted that out of the number of processes carried on by the assessee as noticed in the judgment of the jurisdictional High Court, the Codli unit, Amona Unit and Chitradurga Unit carries on (iii) washing, screening and dressing 115 ITA No. 72&85/PNJ/2012 the ore. It is the contention of the revenue that this washing, screening and dressing of the ore or such other process carried on in the benefication plants of the three units does not amount to manufacture or production. It is further submitted that this controversy is now fairly concluded by the judgment of the jurisdictional High Court in the case of the assessee itself.
v. Firstly, examining the term "manufacture", the jurisdictional High Court has concluded that not only the limited activity carried on by the Codli unit, but the entire activity carried on by the assessee i.e. the extraction of iron ore and the ultimate sale of the same would not amount to manufacture stands settled and concluded in the assessee‟s case. However as far as the Supreme Court level is concerned this issue has been kept open. In the facts of the case of Codli Unit it is only one small activity among the large number of processes involved by the assessee is carried on. When the large activity itself is held as not to be manufacture the question of the Codli, Amona & Chitradurga units independently carrying on manufacturing activity would not arise.
vi. Further, a bare reading of the judgments of the Apex court in 1981 AIR (SC) 1014 Chowgule & Co., P. Ltd., Vs. Union of India & ors., 1980 SCC (Tax) 319 Dy. Commissioner of Sales Tax (Law) Vs. M/s. Pio Food Packers and 1991 AIR (SC) 2222 Collector of Central Excise Vs. S.N. Sunderson (Minerals) Ltd., would also clearly show that the activity carried on by the Codli, Amona & Chitradurga units are not a manufacturing activity, but only an activity of "processing". Earlier even the processing activity was treated as manufacture u/s. 10B of the Act. However this has been specifically excluded. Therefore the assessee will not be entitled to treat its activity as manufacturing activity.
116ITA No. 72&85/PNJ/2012 vii. Section 2(29BA) of the Act defines manufacture. Assessee also does not fall within this definition. Hence, assessee does not carry on the activity of manufacture.
viii. Secondly, the claim of the assessee that the processing of iron ore amounts to "production" is also not correct. The activity of the assessee admittedly is that of a beneficiation plant where impurities are removed from the iron ore collected. Large boulders are sized into powder. It is only a screening process. The jurisdictional High Court as well as the Apex court in the case of the very same assessee as held that extraction of iron ore and ultimate sale of the same amounts to "production". Production is concluded as "extraction" & "processing" of iron ore. If this test is applied to the Codli unit the unit does not carry on any extraction of iron ore. Therefore as held in the assessee‟s own case by both the jurisdictional High Court and the Apex court Codli unit‟s activities cannot be termed as production as only a process is carried on.
ix. Hence, the Codli unit of the assessee does not carry on any manufacture of production activity. It is hit by the restriction imposed u/s.10B(2)(i) of the Act.
x. Assessee‟s arguments was being addressed regarding the actual activity being carried on in respect of Codli, Amona & Chitradurga units. This is reflected in the assessee‟s website, which is enclosed along with this submission.
e. Important Note: Assessee‟s activity has not changed from the inception. The plants under which section 10B deduction is claimed continues to be the same. The same products are fed. This chain of production to ultimate sale cannot be cut into number of independent activity. Therefore the contention of the assessee is incorrect to say that this is an independent unit. The input which was made earlier and now is the same. The contention that it is the end product, tailings, by-
117ITA No. 72&85/PNJ/2012 products etc., are all contentions made to divert the attention from the actual controversy.
f. Case Laws:
1. 1981 AIR (SC) 1014 Chowgule & Co., P. Ltd., Vs. Union of India & ors.,
2. 1980 SCC (Tax) 319 Dy. Commissioner of Sales Tax (Law) Vs. M/s. Pio Food Packers.
3. 1991 AIR (SC) 2222 Collector of Central Excise Vs. S.N. Sunderson (Minerals) Ltd.,
4. (2004) 266 ITR 126 CIT Vs. Sesa Goa Ltd.,
5. CIT vs. Sesa Goa Ltd., (2004) 271 ITR 331 (SC) g. Covered issue:- Similar kind of activity of processing iron ore by washing, drying, powdering etc., is termed as "process" not as "manufacture" or "production" in two judgments viz.,
1. Hon‟ble ITAT, Panaji Bench in ITA No.162 & 184/ PNJ/2006 in the case of Chowgule & Co. Ltd., assessment year 2002-03.
2. (1996) 217 ITR 849 (Kar) V.M. Salagoacar Bros. (P) Ltd., VS CIT.
5. It is not formed by the splitting up or the reconstruction of a business already in existence. [Section 10B(2)(ii)] a. The Codli unit, Amona Unit & Chitradurga Unit commenced their activity in the year 1973, 1958 & 1952 respectively. As held by the jurisdictional High Court in the case of the assessee itself, the assessee carries on number of activities, extraction of iron ore and the ultimate export of the same. The assessee after having taken over all the three units in the years 1978, 1985 & 1998-99 respectively has been carrying on a composite activity of extraction of iron ore and thereafter exporting the same. In this process assessee has claimed deduction u/s.80HHC of the Act. Out of the composite activity of the assessee the Codli unit, Amona Unit and Chitradurga Unit carry on only one exclusive activity i.e., washing, screening and dressing the iron ore.
118ITA No. 72&85/PNJ/2012 b. In this composite activity the assessee was claiming deduction u/s. 80HHC of the Act in respect of the profits earned in the course of export, up to the assessment year 2004-05. When the deduction u/s. 80HHC of the Act was discontinued from the year 2005-06 onwards assessee has tried to break up its business activity of extraction of iron ore and the ultimate export of the same. One such activity carried on by the Codli unit, Amona Unit & Chitradurga Unit of washing, screening and dressing the iron ore is being split up from the composite activity of the assessee which is prohibited under law.
c. Splitting up: A business already in existence is broken up in to different sections and the original integrity is broken vide open. d. Admittedly, the assessee as identified by the jurisdictional High Court was carrying on seven different activities. The Codli unit, Amona Unit & Chitradurga Unit was carrying on one such activity. The assessee by claiming this activity as a separate activity would amount to splitting up of bifurcation of the original integrated activity of extraction of iron ore and export of the same. Hence, the assessee has split up its original activity of business already in existence which is contrary to Section 10B(2)(ii) of the Act. e. Reconstruction of business: "to rebuild or to reconstitute" must necessarily involve the concept that the original business or undertaking is not to cease functioning and its identity is not to be lost or abandoned. The underlying idea of 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 the 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 alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. (1959) 35 ITR 662 (Bom) CIT Vs. Gaekwar Foam & Rubber Co. Ltd., f. Admittedly, assessee was originally carrying on an integrated activity. Under the guise of claiming deduction u/s. 10B of the Act the assessee had identified one of its units and proceeded to make 119 ITA No. 72&85/PNJ/2012 some value addition by way of machinery. The original business activity continues. The original ownership also continues. g. Hence, Section 10B(2)(ii) of the Act, is applicable and the assessee is not entitled to claim deduction.
6. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. [Section 10B(2)(iii)] a. Assessee‟s contention:
The Codli Unit, Amona Unit & Chitradurga Unit have no doubt been processing iron ore from the years 1973, 1958, & 1952. The assessee to these three units has allegedly claimed that it has made certain value addition to the plant and machinery with effect from the Financial Years 2004-05, 2002-03 & 2005-06 respectively in respect of each unit. Therefore, each of these units should be called as new unit entitled for deduction u/s.10B of the Act. b. Revenue‟s submission:
It is found by the Assessing Officer as well as the Appellate Commissioner on facts that these three units have been functioning from the years 1973, 1958 & 1952. The processing of iron ore has continued continuously year after year, month after month and day after day from its inception. The place of business of the three units has not changed. The infrastructure provided originally has not changed. Only alterations have been made. The capacity has been increased. The management continues. The addition made or alterations made do not in any manner create a new unit. It can be safely concluded that the same infrastructure consisting of plant and machinery previously used for other purpose is being utilized in this new industry allegedly claimed to have been started by the assessee constituting a transfer and is hit by section 10B(2)(iii) of the Act.
7. Assessee not maintaining separate books of accounts for each of the units at Codli , Amona & Chitradurga.