Commissioner of Income Tax – I

These appeals arise from a common order of the Income Tax Appellate Tribunal (Tribunal, for short) dated 18th April, 2013. 3. The respondent assessee is a company engaged in the business of manufacture, trading and export of engineering goods etc. and also has a factory located in Noida Export Processing Zone, Uttar Pradesh. The said unit is a 100% export oriented and located in customs bounded area. 2015:DHC:1179-DB

For the assessment year 2007-08, the respondent assessee had filed return declaring loss of Rs.4,11,190/- and had claimed deduction/exemption under Section 10B of the Income Tax Act, 1961 (Act, for short) on profit of Rs.69,69,429/- from the Noida Unit. The Assessing Officer did not allow deduction under Section 10B on the ground that the assessee had not manufactured any goods in the Noida Unit. He referred to reply received from R.N. Metals, Jaipur, M/s Sustul Engg. Corp. Mumbai, M/s Chanderpur Works Yamuna Nagar (Haryana) to the effect that they had manufactured and exported various goods on behalf of respondent assessee. He observed that the aforesaid letters showed that the assessee itself had not undertaken manufacturing activities. The assessing officer noticed that the asessee had incurred electricity expenditure of Rs.19,771/- during the year and Rs.2,27,694/- in the previous year, through they had turnover of Rs.18.92 lacs and had shown opening stock of work in progress of Rs.1.6 crores. The total turnover from Noida unit as declared was Rs.6,19,35,990/-.

For the assessment year 2008-09, the assessment order is more detailed and elaborate. The assessee had filed return declaring NIL income and had claimed exemption/deduction under Section 10B of Rs.12,17,41,816/-. The assessee had claimed that they had earned exempt income as they had carried out upgradation of cement plant in Zambia and also received consideration for design, fabrication and commissioning of a steel rolling mill in Kazakhastan. The assessee had filed a flow chart to explain the nature of work undertaken to support their claim under Section 10B of the Act. It was asserted that the respondent was a multifaceted project engineering company 2015:DHC:1179-DB

The assessee succeeded in the first appeals as Commissioner of Income Tax (Appeals) decided the issue in favour of the assessee. The Commissioner (Appeals) in addition to giving finding on merits in favour of the respondent assessee, applied the principle of consistency. As is apparent, the aforesaid findings have been a affirmed in favour of the respondent assessee by the Tribunal.

In order to decide, the controversy, we would like to reproduce Section 10B(1), (2), (4) and Explanation 2 clauses (iii) and (iv) and Explanation 4 to Section 10B which read: “10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : 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 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 : [Provided [further] that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub- section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequent years : 2015:DHC:1179-DB

Sub-section (1) to Section 10B states that a deduction of such profits and gains as derived from 100% export oriented undertaking from export of articles, things or computer software would be allowed for 10 consecutive assessment years beginning from the year in which the undertaking begins to manufacture or produce articles, things or computer software. Thus for deduction/exemption to be allowed under Section 10B of the Act, the undertaking in question should be 100% export oriented. The profits derived by the said undertaking from export of articles, things or computer software is treated as exempt/deductible for 10 consecutive years beginning from the year when manufacture/production starts. The provisos curtail the quantum of deduction and stipulate how the same is to be computed.

Sub-section (2) stipulates that Section 10B would only apply to an undertaking which manufactures or produces, articles or things or computer software. Such undertaking should not be formed by splitting, reconstruction of existing business and not formed by transfer to new business, machinery or plant previously used. Explanation 2 – clause (iv) states that 100% export oriented undertaking means an undertaking approved as 100% export oriented 2015:DHC:1179-DB

A reading of the aforesaid clauses would indicate that Section 10B of the Act is beneficial provision and has been enacted to give tax concession or exemption to 100% export oriented units engaged in manufacture or production of articles, things or computer software. The exemption is only granted if the assessee has been declared as an 100% export oriented undertaking which means an undertaking approved by the Board appointed in this behalf under the Industries (Development and Regulation) Act, 1951. It is an undisputed and a factual position recorded by the Tribunal that the respondent assessee had an export oriented unit in Noida Export Processing Zone, which was duly approved. The Tribunal has also recorded that the Development Commissioner, Noida Export Process Zone, had extended all facilities and privileges admissible to the said unit under the Export-Import Policy 1997-2002. One of the conditions, for establishment of an undertaking in the said zone was that the undertaking should be manufacturing engineering products and the entire production should be exported, after excluding the rejects and permissible sales in the domestic tariff area. The respondent has entered into an agreement with the said authority for carrying on the said business.

The impugned order passed by the Tribunal has referred to and accepted the flow chart filed by the respondent assessee before the Assessing Officer and the same for the sake of convenience is reproduced below:- 2015:DHC:1179-DB

(a) Aeration Boxes. (b) Aeration Cloth. (c) Air Lift Assembly. (d) Air Lift with Expander. (e) Air Slides (f) Rotary Vane Feeder

(a) Bucket Elevator Parts (b) Chain for the Bucket Elevator The equipment mentioned in the Column "A" of this table were purchased by assessee as per its technical specifications and drawings and after inspection they were assembled together to make a bucket elevator, the elevator was tested for Conformance with the design parameters and thereafter disassembled to shippable size for shipment. For details please refer to Appendix 5

(a) Bags of Dust Collector. (b) Sequential Timer (c) Solenoid Valve The equipment mentioned in the Column "A" of this table were purchased by assessee as per its technical specifications and drawings and after inspection they were assembled together to make Oust Collector, the Oust Collector was 2015:DHC:1179-DB

(a) Table Feeder. (b) Table Feeder The equipment mentioned in the Column "A" of this table were purchased by assessee as per its technical specifications and drawings and after inspection they were assembled together to make a Material by assembling with it scrapper, drive shaft, gearbox, motor etc and fixing the assembly to the Hopper; after, testing the system is disassembled into subassembly called Table type material proportionator. For details refer to Appendix 7. 9. Grit Separate The equipment mentioned in the Column "A" of this table were purchased by assessee as per its technical specifications and drawings and after inspection they was assembled together to make a Coarse Particle Cyclone which is fitted in the Raw Mill section to perform its duty of recycling under done material to the Raw Mill. For details please refer to Appendix 3

Slide Gate. The equipment mentioned in the Column "A" of this table was purchased by assessee as per its technical specifications and drawings and after inspection it was fixed to a hopper to make a. Material Charging Door. For details please refer to Appendix 8

(a) Macc 125A Current Collectors. (b) Safetrack2, SF 2- 200A aluminum shrouded conductor system (c) M.S. Fabricated supports The equipment mentioned in the Column "A" of this table were purchased by assessee as per its technical specifications and drawings and after inspection they was assembled together to make a Down Shop Lead for the Electrically Operated Travelling Crane (EOT). After testing for current carrying capacity and other factors they 2015:DHC:1179-DB

We have referred to Explanation 2 clause (iii) which defines the term ‗export turnover‘ to mean consideration in respect of export by the undertaking of articles or things and excludes freight, telecommunication, insurance charges attributable to delivery of articles and lastly expenses incurred in foreign exchange in providing technical services outside India. Thus, expenses for providing technical services incurred outside India in foreign exchange are to be excluded from export turnover. In other words, expenses incurred in providing technical services outside India but not incurred in foreign exchange, form part of the turnover and are not to be excluded. This is inspite of the fact that under sub-section (1) and (2) there is direct reference to profits and gains derived from export of articles or things 2015:DHC:1179-DB

Read in this manner, we feel that the fact that the respondent assessee had assembled the entire plant outside India from the goods supplied and manufactured in India would include the expenditure incurred for commissioning and providing technical services outside India, after excluding expenses in form of payment made in foreign exchange for technical services provided outside India. It is not the case of the Revenue that the respondent assessee had made payment in foreign exchange for technical services provided outside India.

The next question which arises for consideration is whether the assessee can be considered to be engaged in manufacture and production of articles or things. We have already recorded the findings of the Tribunal on the said aspect. It is apparent that the respondent assessee did not self-manufacture or produce most of the articles or things which were exported and used for setting up the plant. The assessee had undertaken detailed engineering drawings and as per the specification and drawings, the actual manufacture and production work was outsourced. Throughout the said process, inspection was carried out and only after approval, the goods were dispatched. The goods were re-inspected, checked, assembled and disassembled, before they were exported out of India. Only upon satisfactory performance and ensuring that there was perfect matching, the goods were exported. We are in agreement with the findings recorded by the Tribunal that the aforesaid activities qualify and should be treated as manufacture or production of goods by the assessee himself. On the said aspect we would like to reproduce our 2015:DHC:1179-DB

The next aspect or the question is whether the assessee was engaged in manufacture or processing of jewellery or was merely procuring jewellery from the market as a trader and thereafter exporting the same. In the latter case, he would be a trader exporting jewellery and not the manufacturer or processor. The Assessing Officer has recorded that the assessee had purchased gold from MMTC and had swapped the same for readymade jewellery by paying an extra amount and got it prepared from jewellers. Thus, the assessee was neither a manufacturer nor a processor of the jewellery exported. The C.I.T (A) had held that the assessee had purchased gold from MMTC and thereafter paid labour and other charges to the artisans who had manufactured the jewellery on job work basis as per the specifications provided by the overseas buyers to the assessee. Contention of the assessee that to be a manufacturer or processor, they need not carry on manufacturing or processing activities by employing own labour or workers was specifically raised, but not accepted. It was observed that that the assessee had swapped the gold and had procured gold jewellery from reputed manufacturers, without giving further details. The assessee, as observed by C.I.T (A), had paid fixed rate as making charges. Thus, the C.I.T (A) held that the assessee was not a manufacturer of jewellery and had also not processed gold to make jewellery/ornaments, hence was trading in jewellery.

The contention of the Revenue that the assessee was not a processor or manufacturer of jewellery because it had engaged job workers and had not employed their own workers has to be rejected. The Delhi High Court in Orient Longman Ltd. vs. Commissioner of Income Tax, Delhi –II (1981) 130 ITR 477 (Del), had approved the view taken by the Calcutta 2015:DHC:1179-DB

In view of the findings recorded above, it has to be held that sub- clause (a) to sub-section (3) to Section 80 HHC of the Act, would be applicable in view of the factual finding recorded by the Tribunal that the aforesaid work was undertaken by the job workers under the supervision and control of the assessee and under their directions/check.‖

The aforesaid decision in the case of Harig India Limited (supra) is in the context of Section 80HHC of the Act and, therefore, would not be conclusive and completely apposite. The ratio exposits, difference between a manufacturer exporter and a trader exporter. The language and purport of Section 10B of the Act is somewhat different. The term ―manufacture‖ was defined in Explanation 3 to Section 10B prior to its substitution in 2001 by an inclusive definition to mean any process, assembling or recording of programme. Thereafter, by Finance (No. 2) Act of 2009, with effect from 1st April, 2009, the term ―manufacture‖ has been defined in sub-section 29AB 2015:DHC:1179-DB

We may refer with profit to the Supreme Court‘s elucidation in Commissioner of Income Tax, Kerala v Messrs Tara Agencies,[2007] 292 ITR 444 (SC). Herein the Supreme Court has turned to the definition provided in the Central Excise Act, 1944 among other relevant definitions. The relevant paragraphs of this decision are reproduced below: ―11. The term manufacture has not been defined in the Income-tax Act, 1961. 12. The term manufacture has been defined in section 2(f) of the Central Excise Act, 1944. Parts (i) and (ii) of section 2(f) read as under:- 2015:DHC:1179-DB

The term manufacture has been defined by the Black Law Dictionary (5th Edition) as under: 'Manufacture : The process or operation of making goods or any material produced by hand, by machinery or by other agency; anything made from raw materials by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labor or machine.

The word 'manufacture' has been defined in Halsbury's Laws of England, 3rd Ed. Vol. 29 p.23 as under:- 'Manufacture has been defined as a manner of adapting natural materials by the hands of man or by man-made devices or machinery and as the making of an article or material by physical labour or applied power'; but the practice is to 2015:DHC:1179-DB

The Supreme Court of the United States of America has defined the term 'manufacture' a century ago in Anheuser-Busch Brewing Assn. v. United States (1907) 52 L Ed. 336. The definition has been followed in subsequent American, English and Indian cases. The definition reads as under: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary. ..There must be transformation; a new and different article must emerge, .having a distinctive name, character or use.‖

As noticed above, Section 10A/10B is applicable when an undertaking manufactures, or is engaged in production of articles or things. The term ―production‖ has a larger magnitude and is more ITA 1223/2011, 67/2010 and 458/2010 Page 11 expansive and liberal than the term ―manufacture‖. The terms manufacture and produce were interpreted in the Commissioner of Income Tax, Bombay City versus TATA Locomotive and Engineering Company Ltd. (1968) 68 ITR 325 (Bom.), and it was held:- ― In its roots the word "manufacture" comes from the Latin word "manus" which means "hand" (and "manu" is the ablative of the word "manus") and the word "facere" which means "to make". In origin, therefore, the word implied the making of anything by hand, by with the passing of time and in the context of industrial development the word has acquired a number of shades of meaning. In connection with industry or in industrial 2015:DHC:1179-DB

The difference in the words ―manufacture‖, ‗production (to produce)‘ and ―process‖ was examined by the Supreme Court in Commissioner of Income Tax, Kerala v. Tara Agencies, (2007) 6 SCC 429. On the question of what is meant by the term „production‟, it has been elucidated and explained as under:- ―16. In Black's Law Dictionary (5th Edn.), the term ―production‖ has been defined as under: ―Production.—Process or act of producing. That which is produced or made; i.e. goods. Fruit of labor, as the productions of the earth, ITA 1223/2011, 67/2010 and 458/2010 Page 13 comprehending all vegetables and fruits; the productions of intellect, or genius, as poems and 2015:DHC:1179-DB

The term ―produce‖, as defined in New Webster's Dictionary of the English Language (Deluxe Encyclopædic Edition), is as follows: ―Produce.—To bring forth into existence; to bring about; to cause or effect, esp. intellectually or creatively; to give birth to; to bear, furnish, yield; to make accrue; to bring about the performance of, as a movie or play; to extend, as a line. To bring forth or yield appropriate offspring, products, or consequences.‖

In Income Tax Officer versus Arihant Tiles and Marbles Private Limited, [2010] 320 ITR 79 (SC), it was observed that cutting of marble blocks into slabs or tiles per se may not amount to ―manufacture‖ but the activity would constitute ―production‖. Further, when one refers to the word "production", it means a process plus something in addition thereto. Every manufacture can qualify as production but every production need not amount to manufacture. The original marble block does not remain a block when it becomes slab or a tile and undergoes polishing, etc. and, therefore, amounts to production and qualifies for deduction under Section 80IA of the Act. Even though the chemical composition or the basic material may be the same but in commercial parlance, the two products were different. In this case, the Supreme Court noticed and observed that if the ITA 1223/2011, 67/2010 and 458/2010 Page 14 contention of the Revenue is accepted, it would have negative revenue consequences as the assessees are also liable to pay excise duty, sales tax, etc. because of the processing involved, resulting in the said change. The aforesaid change was held to be sufficient. After referring to CIT versus N. C. Budharaja & Co. (1993) 204 ITR 2015:DHC:1179-DB

In CIT versus Emptee Poly Yarn (P.) Ltd. (2010) 320 ITR 665, the thermo mechanical process that converts partially oriented yarn into textured yarn, which is a new and a distinct product or article was regarded as manufacture as it brings about a structural change in the yarn itself. Partially oriented yarn cannot be used in warp or weft but texturized yarn can be used. It was held that the structure, the character, the use and the name of the product are indicia, which are to be taken into account while deciding the question whether the process amounts to ―manufacture‖ or not. We have referred to the said decision, as the chemical composition of the partially oriented yarn and ITA 1223/2011, 67/2010 and 458/2010 Page 15 the textured yarn is similar, but the use, name and character of the yarn becomes different after texturizing.

In the present case, manufacture as well as production of goods, articles or things is covered under Section 10A/10B. The activity for converting gold bricks, biscuit or bars, into jewellery amounts to ―production or manufacture‖ of a new article. The gold, silver or platinum in bar, biscuit or brick form, is converted by manual labour and by the use of implements/tools or by machinery, culminating into an entirely new article/thing called jewellery or ornaments. Jewellery is a wearable item and is used by both 2015:DHC:1179-DB

The aforesaid passage refers to a number of decisions on the said subject. However, we would like to refer to the judgment of the Supreme Court in Commissioner of Income Tax versus Oracle Software India Limited, (2010) 320 ITR 546, in which the controversy was whether the assessee was a manufacturer and thus entitled to deduction under Section 80 IA. The Supreme Court interpreted the term ―manufacture‖ and held that the process of commercial duplication of software requires four steps. Installation/transfer of virtual image of the software on the recordable media with checking of integrity would qualify as ―manufacture‖. It was held that manufacture implies change, but every change is not manufacture despite the fact that every change in an article is a result of treatment of labour and manipulation. If the operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of word ―manufacture‖. 2015:DHC:1179-DB

In CIT versus N.C. Budharaja & Co. (1993) 204 ITR 412, which has been noticed in Lovlesh Jain case (supra), the Supreme Court at page 424 referred to the principle that one must keep in mind the context, since a word takes its colour from the context. In N.C. Budharaja’s case (supra) it was observed that the word ―production‖ has wider connotation than the word ―manufacture‖ and illustratively every manufacture could be categorised as production, but not vice-a- versa. In the present context, in Section 10B, the word ―production‖ has been used in addition to the word ―manufacture‖ and also an expanded scope and ambit is envisaged for the said term in the context of Section 10B in Explanation 4. It would be incongruous and inappropriate in the context of Section 10B of the Act to hold that the respondent-assessee, an 100% export oriented unit, who had refurbished a mini cement plant in Zambia and established a mini steel mill in Kazakhstan, were not engaged in ―manufacture‖ or ―production‖ of articles or things. The fallacy in the argument raised by the Revenue is apparent. It is accepted that in case the mini steel plant and refurbished cement mill had been completely assembled in the unit in Noida and exported as such, the assessee would qualify and would be a manufacturer or a person engaged in production of articles or things. However, benefit under Section 10B, it is asserted by the Revenue, should be denied for what was exported were separated or disassembled parts of the mini cement and steel plant/mill, as it was not possible to export after fabrication and assembly the entire plant/mill itself. The said fabrication and assembly had to be undertaken in view of size and logistics at the location where the plant/mill had to be upgraded or set up. The 2015:DHC:1179-DB

In CIT versus Gwalior Rayon Silk Manufacturing Company Limited, (1992) 196 ITR 149 (SC), it was held that an expression used in taxing statute should be ordinarily understood in the sense it harmonises with the object of the statute to effectuate the legislative intention. If the language is plain and unambiguous, one can look fairly at the language used and interpret it to give effect to the legislative intent. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. Contextual meaning has to be ascertained and given effect to.

The Kerala High Court in Girnar Industries versus Commissioner of Income Tax, (2011)338 ITR 277 (Kerala) with reference to Section 10A of the Act referred to the definition of the term ―manufacture‖ in Chapter IX of Exim Policy clause 9.30 and noted that the definition of the term ―manufacture‖ contained in Section 2(r) of the Special Economic Zones Act, 2005 was incorporated later under Section 10AA of the Act with effect from 10th February, 2006. The said definition includes make, produce, fabricate, assemble, process, etc. by hand or by machines, a new product having a distinct name, character, use and would also include 2015:DHC:1179-DB

In view of the aforesaid discussion, the substantial question of law framed above is answered in favour of the respondent-assessee and against the appellant-Revenue. In the facts of the case, there will be no order as to costs.