JAYDEEP PETRO CHEM CO. PVT. LTD.,CHENNAI vs. ITO, CORPORATE WARD-2(3),, CHENNAI

10. The Ld. Counsel argued that in the preceding year i.e. for AY-2005-06 vide order u/s. 143(3) dated 05.12.2007, the Revenue has allowed its claim of deduction u/s 80IB(2)(iv) of the Act and that in subsequent year also its claim of deduction u/s 80IB(2)(iv) of the Act stands allowed by the Revenue. The Ld. Counsel vehemently argued that the facts of the case as available in AY-2005-06 as also in subsequent year are identical. The Ld.Counsel for the assessee further relied upon the judicial precedent laid down by the Hon’ble Bombay High Court in the case of Jyoti Plastic Pvt Ltd dated 15.11.2011 as at 16 taxmann.com 172. In support of its contentions, the Ld. AR has filed a voluminous paper book comprising documents, inter-alia, including agreement / invoices for contract labour, register of wages, copies of return of income / balance sheet / profit & loss account for AY-2006-07 and 2007-08, remand report and its rejoinders etc, all of which were available before the lower authorities. 4.0 Per contra, the Ld.DR relied upon the order of the lower authorities. It was argued that the decision of Jyoti Plastic Pvt Ltd (Supra) is not applicable in this case since the same pertain to issue of contractual workers in manufacturing process and that in the present Page - 4 - of 17 case the contracted workers were not engaged in manufacturing process. The Ld. DR urged that the distinguishment made by the Ld.AO on the issue of absence of any manufacturing process was well founded. On the issue of allowance been made in earlier and subsequent years, the Ld. DR argued that principles of res judicata do not apply to direct taxes and that therefore no reliance can be placed upon the decision taken in earlier and subsequent years. 5.0 We have heard rival submissions in the light of material available on records. Before proceeding further, we deem it appropriate to reproduce the statutory provisions of section 80IB(2)(iv) which are at the center of the controversy: “…….Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. 25 26 80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from 27 any business referred to in sub-sections (3) to 28[(11), (11A) and (11B) 29] (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 formed by splitting up, or the reconstruction 30, of a business already in existence : 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 30manufactures 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 part 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) Page - 5 - of 17 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 (ii), 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 (ii) 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 31employs 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…..”

6.0 The only issue in the appeal is as to whether the assessee is entitled for award of deduction u/s 80IB(2) or not. On perusal of the statutory provisions extracted hereinabove, we have noted that broadly speaking section 80IB(2) postulates that for grant of deduction an appellant must satisfy three basic conditions. Thus, firstly the appellant assessee should be engaged into some manufacturing activity, secondly the machinery used should not be an old machine and thirdly the assessee must employ 10 or more workers if using power and twenty if not using power. As far as the first limb of the controversy is concerned we have noted that the assessee had vide reply dated 18.09.2024, during

Page - 6 - of 17 remand proceedings explained to the Ld.AO in great detail the process of manufacturing under taken by it. The Ld.AO however in its remand report dated 25.10.2024 concluded that as the assessee is merely producing varnish, thinner etc by mixing of certain raw materials and which does not require any expert knowledge therefore the same cannot be taken as manufacturing activity qua 80IB(2). The conclusions drawn by the Ld.AO have been found to be unwarranted. Etymologically understood manufacturing is the process of transforming raw materials into finished goods, typically on a large scale, using machinery, labor, and often, industrial processes. It encompasses a wide range of activities, from initial product design and material selection to the final assembly and packaging of the product. It is a process of making a product using raw materials through hands or by machinery. It is the act or process of producing something. Thus when two or more independent chemicals or other raw materials are combined using human labour and machines and the end product is chemically, physically different from the original two or more independent chemical ingredients then it can be safely said that process of manufacturing has taken place. The primary test is that the end product should be totally different from the original ingredients. This process of manufacturing can be simple like a mere mixing of two items or a complex process involving mechanical, electrical and other

Page - 7 - of 17 attributes. In the present case, the Ld.AO has admitted in his remand report(supra) that the assessee is engaged in the activity of mixing of certain raw materials. It is another thing that according to the Ld.AO, the same does not require any expert knowledge. In the process of manufacturing, it is not necessary that there should be any involvement of any expert knowledge. The basic requirement is that two ingredients should be united to give birth to another new ingredient which is fundamentally different from the consequents. It is not the case of the Revenue that the assessee has not joined different chemicals to give birth to vanish and thinners. This proposition finds favour in the decision of Hon’ble Madras High Court in the case of DXN Herbal Manufacturing India Private Limited 96 taxmann.com 299 holding as under:- “……23. The factual matrix clearly demonstrates that what has been done by the assessee is manufacture. Thedecision relied on by the Revenue in the case of Sacs Eagles Chicory v. CIT [2002] 123 Taxman 221/[2003]255 ITR 178 (SC) is distinguishable on facts as the activity which was the subject matter of the said case wasmaking powder from chicory roots and the appeal by the assessee was dismissed as the assessee failed tosatisfy the test laid down in Aspinwall & Co. Ltd.'s, case (supra). The learned counsel for the Revenue reliedupon the decision of the Division Bench of this Court in CIT v. Madurai Pandian Engg. Corpn. Ltd. [1999]239 ITR 375 (Madras). The question was whether the business of tyre retreading done by the assesseeamounts to production of a new article and whether the assessee was entitled to relief under Sections 80J and80HH of the Act.

Page - 9 - of 17 "3.. In our view, the quantities of tea purchased by the assessees cannot, since the date of the purchases,be regarded as 'purchased within the meaning of proviso to clause (a) of Section 8 of the Act. There isnot even application of mechanical force so as to subject the commodity to a process, manufacture,development, or preparation. The commodity has remained in the same condition,. It is true that in thepreparation of the tea mixture which is marketed, there may be some skill involved. But that, in ourjudgment, cannot be regarded as processing within the meaning of the proviso... 4.. It cannot however be said that in the preparation of tea mixture there is any alteration in the goods.Undoubtedly by mixing up the different varieties of tea purchased by the assessees there resulted amixture in which the individoulity of the components was obscured, but that in our judgment, is notalteration within the meaning of the Act. The alteration contemplated by the legislature is some alterationin the nature or character of the goods."

13. However, we wish to state that the nature of the product that was contracted for in Chowgule & Co. (P.)Ltd. namely, a particular combination of ore, was the pertinent point which actually distinguished the casefrom the facts in Nilgiri Ceylon Tea Supplying Co. (supra) from Chowgule & Co. Private Ltd. (supra).

14. Since another three-Judge Bench of this Court has considered the ramifications of the order of reference ofthe Bombay High Court in Nilgiri Ceylon Tea Supplying Co., although without reference to Chowgule & Co.Private Limited (supra), we find that the judgment of this Court in Chowgule & Co. Private Limited (supra)as well as M/s Shiv Datt and Sons proceed on different sets of facts and therefore, in that context, theperception of respective three judge Benches on the order of reference made by the Bombay High Court isdistinct as it is with reference to the particular factual matrix under consideration.

16. In the circumstances, we find that the High Court rightly answered the questions of law raised before it in favour of the respondent-assessee and consequently, sustained the orders of the Commissioner appeals and Tribunal which had rightly set aside the order of the Assessing officer.….”

Page - 11 - of 17 Thus, there is no doubt in this case that the assessee is not engaged in the business of manufacturing. The first limb of section 80IB(2) regarding an assessee being engaged in the activity of manufacturing is therefore is satisfied. 8.0 Coming to the next limb as to whether the assessee has used new machinery or the old machinery we have noted that the Ld.AO in his remand report dated 25.10.2024 has given a categorical finding that the assessee has used new plant and machinery and that no case of use of any old plant and machinery is made out. Accordingly, second limb of section 80IB(2) regarding an assessee using new plant and machinery for its manufacturing activity is also therefore satisfied. 9.0 This brings us to the third and final limb of 80IB(2) that the assessee engaging 10 or more persons in its undertaking while using power. The Ld.AO in his remand report has stated that the assessee is having only six regular employees comprising a factory manager, a quality controller, an accountant, a receptionist, an office boy and a driver. It is the case of the Ld.AO that the contractual workers utilized by the assessee from a contractor namely one Mr.R.Sivakolundhu cannot be taken as part of assessee’s employees. During the course of present hearing the Ld.Sr.DR Ms.R.Anitha, submitted that the said contractual workers are not engaged in the business of manufacturing

Page - 12 - of 17 and therefore the assessee will not get benefit of the ruling of Hon’ble Bombay High Court in the case of Jyoti Plastic (supra). It was argued that they are engaged in activities of gardening, housekeeping etc. As far as the controversy as to whether the contractual workers can be considered for the numerical satisfaction prescribed in section 80IB(2)(iii), we have noted that Hon’ble Bombay High Court in the case of Jyoti Plastic (supra) has deliberated upon the matter extensively to hold that contractual workers have to be included in the condition of 10 workers. Thus, the Hon’ble Bombay High Court has ruled as under:- “……12. As regards the second question is concerned, the dispute is whether the assessee has fulfilled the conditions set out in Section 80IB(2) (iv) of the Act. Section 80IB(2)(iv) of the Act reads thus : 80-IB (2) This Section applies to any industrial undertaking which fulfils all the following conditions, namely(i) to (iii) ******(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.

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15. In the present case, it is not the case of the Revenue that the total number of workers employed in the manufacturing were less than ten at any point of time during the relevant assessment year. Therefore, when Section 80IB(2)(iv) of the Act merely provides that the undertaking must employ ten or more workers(whether directly employed or not) in the manufacturing process carried on with the aid of power, it would not be proper to hold that Section 80IB(2)(iv) refers to ten workers employed by the assessee directly. In other words, when the language used in Section 80IB(2)(iv) does not suggest that restricted meaning must be given to the expression 'worker', it would not proper to give a restricted meaning to that expression and hold that Section 80IB deduction is allowable only if the workers directly employed by the assessee exceed ten. To put it simply, the condition imposed under Section 80IB(2)(iv) of the Act is that the assessee must employ ten or more workers in the manufacturing process / production of articles or things and it is immaterial as to whether the workers were directly employed or employed by hiring workers from a contractor.

10.0 Thus placing respectful reliance upon the order of Hon’ble Bombay Higher Court (Supra) it can be concluded that the contractual workers engaged by the assessee would fulfill the condition of engaging 10 or more workers. Another part of this controversy is as to whether the said contractual workers participated in any manufacturing activity or not. We have noted from the perusal of Profit & Loss account of the assessee for AY-2006-07 and 2007-08 it has sold stock worth Rs.8.81 Crores and Rs.10.41 Crores in year ending 31.03.2007 and 31.02.2006 respectively. It is beyond any reasonable imagination that such quantity of stock, no matter how simple the process of manufacturing is can be accomplished only by two staff members being a factory manager and a quality controller. According to the Ld.AO only these two out of total six employees are Page - 15 - of 17 on pay roll of assessee. Needless to say the assessee was being assisted by some other staff members of contractual nature to assist in industrial activity. The Ld.Counsel for the assessee stated that it has been provided 12 contractual staff members which were also used in its industrial activity. Countering argument of the Ld.DR of the same being engaged in gardening and house keeping activities only, the Ld. Counsel submitted that it does not has any large garden and housekeeping requirement for employing such a large number. We have also noted that the agreement between the assessee and Mr.R.Sivakolundhu provides that the contracted workers will be engaged in gardening / housekeeping and other activities. The latter being as per mutual agreement between the two parties. This goes on to indicate that the agreement postulated activities which were not specifically mentioned in the agreement. It is the case of the assessee that it has maintained a specific wages register for the workers including contractual workers. Accordingly, in the light of decision of Hon’ble Bombay High Court, in the case of Jyoti Plastic (Supra) as also other factual matrix of the case discussed hereinabove, we of the considered view that the third limb of section 80IB(2) qua the undertaking engaging 10 or more workers also stands satisfied in this case. The addition made by the Ld.AO and its confirmation by the Page - 16 - of 17 & 180 /Chny/2025 Ld.CIT(A) is therefore not based upon correct understanding and appreciation of the facts on record. Accordingly, we set aside the order of lower authorities and direct the Ld.AO to delete the impugned addition of Rs.65,09.140/-. All the grounds of appeal raised by the assessee are therefore allowed. 11.0 The decision taken in shall apply mutatis mutandis in ITA No.179 for AY-2006-07. 12.0 In the result, the appeals of the assessee are allowed Order pronounced on 18th , July-2025 at Chennai. Sd/- Sd/- (मनु कुमार धिरर) (अधमताभ शुक्ला) (MANU KUMAR GIRI) (AMITABH SHUKLA) न्याधयक सदस्य / Judicial Member लेखा सदस्य /Accountant Member चेन्नई/Chennai, धदनांक/Dated: 18th , July-2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai/Coimbatore/Madurai/Salem. 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF

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