DCIT, CIRCLE-1, THANE, THANE vs. M/S ACE PLASTICS , MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “SMC”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.947/M/2022 Assessment Year: 2011-12

Dy. Commissioner of M/s. ACE Plastics, Income Tax, 19-A, Mira Industrial Circle -1, Estate, 6th Floor, Western Express Vs. Ashar IT Park, Highway, Room No.22, B-Wing, Mira Road (East), Wagle Industrial Estate, Thane – 401 101 Road No.16Z, PAN: AAFFA1338Q Thane (West)-401 101 (Appellant) (Respondent)

Present for: Assessee by : Shri Ajay Singh, A.R. Revenue by : Shri Krishna Kumar, D.R. Date of Hearing : 16 . 11 . 2022 Date of Pronouncement : 30 . 11 . 2022 O R D E R Per : Kuldip Singh, Judicial Member: The appellant, Dy. Commissioner of Income Tax, Mumbai (hereinafter referred to as ‘the Revenue’) by filing the present appeal, sought to set aside the impugned order dated 23.11.2021 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2011-12 on the grounds inter-alia that :-

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“1. Whether on the facts and in circumstances of the case and in Law, the Ld. CIT(A) has erred in granting relief of erroneous claim of deduction u/s 80IB of the Income Tax Act, 1961? 2. Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT (A) failed to appreciate the fact that the assesses got its own goods manufactured at an non-80IB Unit and had paid labour charges of Rs.45,18,797/- thereby not satisfying one of the conditions of section 80IB(2) (iv) of the Income Tax Act, 1961? 3. The appellant craves leave to add, alter, amend and modify any of the above grounds of appeal.”

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Rs.13,20,693/- which was accepted by the Assessing Officer (AO) by framing the assessment under section 143(3) of the Act. Subsequently, assessee’s case was reopened to examine the issue of allowability of deduction under section 80IB of the Act by way of issuing notice under section 148 of the Act. Assessment framed under section 143(3) read with section 148 of the Act by determining the total income of Rs.45,08,804/- by making disallowance of Rs.5,46,724/- out of the total deduction claimed by the assessee under section 80IB of the Act amounting to Rs.13,20,693/-.

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appellant. In the instant case, the assessee's case for the AY 2005-06 was reopened on the basis of audit objection that the deduction u/s 80 IB was wrongly allowed to the extent of Rs. 13,20,693/- as assessee got its own goods manufactured at non-80-IB unit, had paid labour charges of Rs 45,18,797/- and it was eligible for the deduction to the extent of Rs. 7,73,9697-. During the reassessment proceedings, the assessee submitted before the AO that it had rightly claimed deduction u/s. 80IB of the Act and only on the basis of part of the manufacturing activity being done from outside unit, the deduction u/s. 80IB could not be disallowed. However, the AO was not satisfied with the assessee's submission. The AO mentioned that since the assessee got its own goods manufactured at an non 80-IB units(s) and had paid labour charges of Rs. 45,18,7977- to outside party namely M/s. Petuela Industries, hence it is not eligible for deduction u/s. 80IB as it does not fall under the industrial activity carried out by the assessee's own industrial undertaking. The appellant has contested this action of the AO by stating that it satisfied all conditions for claim of deduction u/s 80IB. It was stated that only a part of the manufacturing activity was done outside and the provisions of section 80IB nowhere states that entire manufacturing activity must be done in-house. It was argued that outside agency from whom the work was got done worked directly under appellant's supervision and control. The appellant has also relied on certain judicial precedents to argue that // part of the manufacturing activity is being done from outside agency, particularly when such work was done from outside agencies under the direct supervision and control of the assessee and at the risk of the assessee, the deduction u/s. 80IB cannot be disallowed. Considering the facts of the case and appellant's written submissions, I am inclined to agree with the appellant's claim. At this juncture, it would be appropriate to reproduce the provisions of sec. 80IB of the Act which reads as under:-

"Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.

80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub- sections (3) to 81[(11), (11A) and (11B)81a] (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:— (i) it is not formed82 by splitting up82, or the reconstruction82, of a business already in existence :

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Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any pail of India : Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1.—For the purposes of clause (//'), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :— (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.—Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (//') of this sub-section, the condition specified therein shall be deemed to have been complied with;

(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

(3) The amount of deduction in the case of an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial

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undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co- operative society) beginning with the initial assessment year subject to the fulfilment of the following conditions, namely :—

(i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st day of March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant [not specified in sub-section (4) or sub-section (5)] at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 83[2002].

84(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking : ------------------------------------------------------------------------------------- From plain reading of this section, it is clear that to claim deduction u/s 80IB, an industrial undertaking must satisfy the following conditions:

A. It should be a new undertaking, not formed by splitting up, or the reconstruction, of a business already in existence. B. It should not be formed by transfer of machinery or plant previously used for any purpose. C. It manufactures or produces any articles or things (not being an article or thing specified in the Eleventh Schedule) or operates cold storage plant, in any part of India. D. It begins to manufacture or produce of articles or things or to operate cold storage plants within a specified time limit. E. In case where the industrial undertaking manufacture or produces articles or things, the undertaking employs 10 or more workers in a manufacturing process carried on with the aid of power, or employs 20 or more workers in a manufacturing process without the aid of power. There is no dispute about the fact that the assessee firm was engaged in the business of manufacturing of plastic containers, bottles, caps etc. and it is eligible for deduction u/s. 80IB of the Act.

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The only dispute is whether if a part of the manufacturing is done outside, the deduction u/s. 80IB is allowable or not. From the process as explained by the appellant firm, it can be noted that the major activity of the manufacturing is carried out inside the factory by own labour. Only part of the activity with respect to certain goods is being carried out from outside agency on labour charges basis for following reasons which have been mentioned by the appellant:-

(I) protecting business confidentiality (ii) safety against loss of business (Hi) controls safety against risk of rejection (iv) competitive cost (v) close monitoring and control of materials & production supply (vi) savings in cost of delivery & dispatch

From the above, it is clear that the appellant is sole and major manufacture of such items. The dominant formation of the assessee's activity is being carried out by the assessee itself.

Thus, the primary condition for claiming exemption u/s 80IB that the assessee must be engaged in the manufacture or produce of an article or thing is fulfilled. Merely part of the manufacturing activity being done by outside agency does not render the assessee firm non-eligible for deduction u/s. 80IB of the Act. At this juncture, I may refer to certain case-laws wherein identical issues were discussed and decided by various courts.

"....The Madras High Court has eschewed from consideration one important activity carried on in the matter, namely, the activity relating to fumigation by the treatment with methyl bromide on the ground that it was done by another (Mysodet Pvt. Ltd., Bangalore) on behalf of the assessee. That is an irrelevant or immaterial factor. The sole question is, whether on a consideration of the totality of the activities including the one relating to fumigation by the treatment with methyl bromide which enables the goods to be exported as a marketable commodity, amounted to the business of processing of goods....."

The Hon'ble Calcutta High Court in the case of Addl. CIT Vs. A.Mukherjee & Co. (P) Ltd. reported in 113 ITR 718 observed as below.

"In order that a publisher of books should be a manufacturer of books it is wholly unnecessary for him either to be an owner of a printing press or to be a book-binder himself. A paper is not a book, though it is printed on papers. A publisher

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may get the books printed from any printer but the printer is not the manufacturer but a mere contractor. The findings of the Tribunal in our opinion conclusively show that the assessee was carrying on the activity of manufacturing and also of processing of books which are also goods. The argument, namely, that the assessee was not mainly carrying on manufacturing or processing activities in view of the Tribunal's finding that "the assessee's activity cannot be called purely a trading activity" does not appeal to us. The assessee did not purchase any books from market or sell them at a profit. The assessee published books and sold them in the market. We also agree with the finding of the Tribunal that the assessee was also carrying on the processing activity in as much as the assessee had to do many things as stated in its order..."

The Hon'ble Delhi High Court in its decision in the case of Orient Longman Ltd. vs. CIT reported in 130 ITR 477 observed as below.

"Held, that though the assessee as a publisher would not be doing more than getting the manuscript and preparing the same for printing and book binding, yet the fact that printing and book binding was done by someone else did not imply that someone else was the manufacturer. It was the business of the assessee to get the books manufactured by getting the manuscript, designing the nature of the book, finishing the anticipated product and then selling the product after getting it made. Therefore, the assessee was an "industrial company" within the meaning ofs. 2(6) (c) and was entitled to be assessed at the concessional rate of tax in accordance with the provisions of the Act."

Similar view as above was upheld by the Hon'ble Bombay High Court in the case of CIT Vs. Penwalt India Ltd. reported in 196 ITR 813 and CIT vs. Oricon P. Ltd. reported in 151 ITR 296. In the case of Sanjay K. Sarawagi Vs. CIT reported in 1 SOT 364, it has been held that "it could not be said that merely because a part of the process resulting in end products was carried on by an outside agency, assessee would lose the character of being an 'industrial company'. In other words, the assessee would still be considered as a manufacturer even if a part of the manufacturing activity was entrusted to an outside agency."

It is seen that in case of publisher of books, the issue also came up before the CBDT where the CBDT accepted that though the book publishing companies may themselves not be engaged in the printing or binding of books, yet they qualify to be treated as industrial companies. The said Circular reads as below.

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Circular No. 347 dated 07.07.1982 (1982) 137 ITR (St) 14 "The Board has received representations that companies engaged in publishing of books should be treated as industrial companies for the purpose of section 104 of the Income-tax Act, 1961. Reference has been made in this connection to the decisions of the Madras and Calcutta High Courts in the cases of CIT, Madras v. Commercial Laws of India Pvt. Ltd. [1977] 107 ITR 822, and Addl. CIT, West Bengal-11 v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718, respectively. In the Madras decision it has been held that folding and stitching the printed sheets and converting them into parts or books, as the case may be, constituted processing of goods. In the Calcutta decision it was held that it is wholly unnecessary for a publisher of books to be an owner of a printing press or to be himself a book binder to be a manufacturer of books. A publisher may get the books printed from any printer, but the printer is a mere contractor and the publisher carries on the business of manufacturing and processing of goods.

If payment to workers is made on job work basis or piece rate basis, persons doing work are to be considered as employees of the assessee. In the case of CIT vs. Rajmohan Cashews (P.) Ltd. reported in 185 ITR 472 (Ker), order was challenged by the Revenue before the Tribunal. The Tribunal held:

". . . An activity of 'manufacture or processing' could be carried on by an assessee either with plant and machinery belonging to others by paying the necessary charges for the use of such plant and machinery. In the present case, the assessee has chosen the latter course as it would have been an onerous responsibility to start a factory of its own, install plant and machinery and engage labour and create certain permanent commitments. The payments made by the assessee towards the processing of the nuts have been made under specific heads, such as roasting wages, peeling wages, shelling wages, etc., as demanded by the factories in which the processing is done. Keeping these facts in view, we consider that the assessee satisfies the condition of being a company engaged in the processing of goods and, accordingly, answers the description of an 'industrial company' within the meaning of section 2(7)(c) of the Finance Act, 1973. The Appellate Assistant Commissioner was, therefore, right in directing the

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Income-tax Officer to treat the assessee as an 'industrial company' and in taxing it as such." (emphasis supplied)

It was observed by the Hon'ble High Court that clause (c) which we have set out above shows that the company has to be "mainly engaged" in the processing of goods to claim the status of an industrial company. The note to the Income-tax Officer's order shows that, out of Rs. 12,95,017 expended by the assessee for manufacturing purposes, Rs. 11,22,128 has been paid as outside processing charges. This means that the bulk of the processing charges has been paid to outside agencies. It is on that assumption that the Officer found that the assessee was not engaged mainly in processing.

The Hon'ble High Court on the basis of facts found by the Tribunal held that the fact that the processing was not done in the factory of the assessee, but in the factory of someone else would not necessarily mean that the assessee is not mainly engaged in the processing of the goods, provided there is material to show that the processing was done by the outside agency for and on behalf of the assessee and the charges incurred therefore were met by the assessee directly. The books of account of the assessee disclose, as found by the Tribunal, that the labour charges have been directly paid by the assessee under various heads in respect of the processing done in the factories of outside agencies. This means that, for the purpose of processing the goods entrusted by the assessee, the men employed in the factory of the outside agency are, for all practical purposes, the employees of the assessee itself..."

Further, in the following judgment it has been held that where the work is being processed by third parties under the direct control and supervision of the assessee, the same amounts to manufacture and eligible for deduction under the Act.

Neelu Textiles v. Addl. CIT-128 Taxman 93 (Jodh) The assessee-firm was engaged in cloth manufacturing. Entire production process included, inter alia, purchase of yam, weaving of yarn and production of grey cloth, mending, processing and putting the logo/name of company, its trade name and to market the products. However, a part of the production process, i.e., weaving of yarn and production of grey cloth, was got done by outside agency. The assessee claimed deduction under section 80-IA. But the Commissioner (Appeals) partly sustained the disallowance, holding that the deduction should be confined only to the cloth manufactured in the assessee's factory.... ".... We have considered the rival contentions, the relevant material on record as also the cited decisions. In 196 ITR 813 (supra) the fact-situation was that the assessee was getting

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machinery manufactured by somebody else under its direct supervision and control whereas all other activities were undertaken by assessee which included (1) canvassing of orders, (ii) preparing of designs and drawings on the basis of orders (Hi) placing orders for the manufacture of machinery with third party. In the circumstances, it was held that the assessee was engaged in the manufacture of sugar and tea machinery and was entitled to special deduction under section 80-1.

In 235 ITR 70 (supra) the assessee was getting the brass articles manufactured from artisans and the articles so manufactured under close supervision/control of assessee conforming to design, shape and pattern suggested by assessee and the assessee was advancing money to artisans for purchase of raw materials. It was held by the Hon'ble Bombay High Court that the assessee was an industrial company manufacturing or processing goods, and so entitled to concessional rate of tax. As such, considering all the facts and circumstances of the case, we find that it is only a part (weaving part) of the entire process of production which is being got done by assessee from the third/outside parties on job work basis and not the whole production process, so considering the above legal position, we find the matter covered in assessee's favour by the decision of this Bench in ITA No. 2217/JP/95 for assessment year 1989-90 in the case of AC IT v. Swastik Textiles. We, therefore, follow the aforesaid decision of this Bench and accordingly find the assessee entitled to deduction under section 80-IA in respect of cloth also in respect of which the weaving part was got done by third parties on job work basis; and so we delete the disallowance."

Similar view as above was held by the Hon'ble Bombay High Court in the case of CIT vs. Neo Pharma Private Ltd. reported in 137 ITR 879. In the said case, all the raw materials including packing materials were supplied to third party for manufacturing the drug and the drug was manufactured under the direct control and supervision of the principal party. It was held to be a manufacturing concern.

In the case of CIT Vs. Talwar Khuller (P.) Ltd. reported in 235 ITR 70, it was held as below:-

"Held, that a processor of goods need not himself carry out all the processes resulting in the end product: he may get some of them done by a third party. The artisans were not free to manufacture any item of their own in any shape or pattern they liked but they were guided by the assessee itself as to which pattern and design they were required to manufacture.

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Applying the test of close supervision and control, the Tribunal was right in holding that the assessee was an industrial company as defined in section 8(c) of the Finance Act, 1975, entitled to the concessional rate of tax".

In the case of CIT Vs. Indian Resins and Polymers reported in 235 ITR 5, it was held as below:-

"The assessee carried on business in respect of kernels and shell oils. The assessee purchased raw cashew nuts and after drying them, it entrusted them with a company for processing. The processed cashew kernels were brought back to the assessee's unit and packed and exported. The assessee was also extracting oil from the cashew shell and exporting the same. The assessee claimed deduction under sections 80HH and 80J of the Income-tax Act, 1961, on the ground that it was an industrial undertaking engaged in the manufacture and production of an article or thing. The Assessing Officer rejected the claim for deduction on the ground that the assessee did not manufacture or produce the cashew kernels and that it played only the role of a trader and, therefore, was not entitled to claim deduction under section 80HH. The Assessing Officer also rejected the claim of the assessee for deduction under section 80J of the Act on the ground that the assessee did not carry on any activity of manufacture or production of any article. The Commissioner (Appeals) held that though the assessee carried on a manufacturing activity since the assessee did not satisfy the conditions contained in clause (iv) of section 80HH(2) of the Act, it was not entitled to deduction under the section. However, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee for deduction under section 80J on the ground that the assessee carried on a manufacturing activity and the mere fact that the assessee did not directly process the cashew kernels would not be a reason to find that it was not carrying on a manufacturing activity. On further appeal, the Tribunal found that part of the manufacturing activity was carried on by the assessee since drying the raw cashew in sunlight and the ultimate packing were done by the assessee and that even though the assessee got the work of roasting and dehusking done by a third party, such work was being done under the direct supervision of the assessee. As far as the claim for deduction under section 80HH of the Act was concerned, the Tribunal took the view that the assessee had satisfied the conditions of clause (iv) of section 80HH(2) and that apart from the permanent workers, the other workers who were employed either on a casual or a temporary basis were also to be taken into consideration to examine whether the assessee had satisfied the conditions contained in clause

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(iv). The Tribunal thus allowed the claim of the assessee for deduction under section 80HH. On a reference: Held, affirming the decision of the Tribunal, that the conversion of raw cashew nuts into cashew kernels would be a manufacturing or processing activity and that the assessee was an industrial undertaking entitled to deduction under sections 80HH and 80J of the Act." Similar view as above was pronounced in the case of Sunrise Metal Industries Vs. ITO reported in 89 ITD 406. 10. The words "control and supervision" have not been defined anywhere in the Income Tax Act. Law lexicon defines "control" to mean "to check, to regulate, to govern, keep under check, to dominate, to exercise a direct influence over to have authority over the particular matter" and "supervision" to mean "power of inspection and superintendances of the manual work of others." It can be noted that the work given on job was verified by the appellant and then only payments were made. Control and supervision does not mean that it must be constant. It can vary according to the nature of work. Control and supervision does not mean that either the appellant or his agent should daily go and inspect the work as also the quality. Needles to mention that the ownership over the goods remained with the appellant all the time. The goods were manufactured at the cost and risk of the appellant and the appellant received the same material after job done by outside party. There was no exchange of raw material with the outside party. Under the circumstances, it requires to be held that the manufacturing actually belonged to the appellant. In view of the facts of the case, legal position and judicial precedents as discussed in para nos. 8 to 10 (supra), I am of the considered view that the appellant-firm was engaged in manufacturing or produce of article or thing as required u/s 80IB of the Act and therefore, it is entitled for deduction u/s 80IB to the extent of Rs. 13,20,693/- as claimed by the appellant. The disallowance made by the AO at Rs. 5,46,7241- is directed to be deleted. The ground no. 2 raised by the appellant regarding this issue is allowed.”

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India Ltd. 196 ITR 813 (Bom.) and CIT vs. Oricon P. Ltd. 151 ITR 296. So merely because of the fact that part of the manufacturing process resulting in N products was carried on by an outside agency the assessee would still be considered as manufacturer. The co- ordinate Bench of the Tribunal has also taken identical view in case of Sunrise Metal Industries (supra). The Ld. D.R. for the Revenue has failed to bring on record if this settled proposition of law has been overturned by any higher forum.

Order pronounced in the open court on 30.11.2022.

Sd/- (KULDIP SINGH) JUDICIAL MEMBER Mumbai, Dated: 30.11.2022. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench

//True Copy//

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.