DAXEN AGRITECH INDIA PVT. LTD.,BADDI vs. ACIT, CIRCLE, PARWANOO

Order PER BENCH: All the above appeals filed by the Assessee against the separate orders of Ld. CIT(A) / NFAC, Delhi each dt. 26/02/2024.

3. We shall take up the appeal of the Assessee in for the A.Y 2011-12 as a lead case.

4. This appeal filed by the assessee is directed against the order dated 26.02.2024 passed by the CIT(A), NFAC, Delhi, arising out of the assessment order dated 23.12.2018 passed by the Ld. AO u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 for the Assessment Year (AY) 2011-12 wherein the assessee has raised the following grounds: 1. Whether the impugned assessment order dated 23.12.2018 passed by learned ACIT Circle Parwanoo as well as impugned order dated 26.02.2024 passed by learned CIT (Appeals) NFAC Delhi are illegal and not legally sustainable in the eyes of law and thus liable to be set aside?

2 2. Whether the learned authorities below committed gross illegality in rejecting the genuine claim of the assessee claiming deduction under Section 80 IC of the Act after overlooking/misinterpreting the findings/observations given by Hon'ble High Court of Judicature at Madras in its judgment dated 21.06.2018? 3. Whether the learned authorities below acted mere on the presumptions and committed gross illegality in observing that the assessee is not engaged in any manufacturing activity? 4. Whether the learned Assessing Officer in the present case acted beyond his jurisdiction 5. Whether there is utter violations of the Principal of Natural Justice? 6. Whether the alleged inspection report carried out by the Assessing Officer by his own can be relied upon in the absence of any independent witnesses? 7. Whether the statements relied upon by the Assessing Officer can be legally sustainable in the absence of any cross examination or following the proper procedure etc.? 8. Whether the learned authorities below can overlook the copies of the licensees/certificates/renewal/permissions granted to the assessee by various authorities for manufacturing of Ayurvedic Medicines by the competent authorities and thus the findings given by the Assessing Officer in assessment order dated 23.12.2018 and findings of order dated 26.02.2024 passed by learned CIT (Appeals) are perverse and thus liable to be set aside.

9. That the impugned Orders had been passed in gross violation of the principle of natural justice and without allowing reasonable/effective opportunity of being heard to the Assessee. 1 0. That the appellant craves to add, amend, or alter grounds of appeal before the appeal is finally heard and disposed off.

5. Briefly, the facts of the case are that the assessee is a private limited company engaged in the business of manufacturing Ayurvedic medicines namely Reishigano (RG) and Ganocelium (GL) capsules. For the relevant AY 2011-12, it filed its return of income declaring NIL income after claiming deduction u/s 80-IC of Rs. 3,60,35,565/-, which was processed u/s 143(1). Subsequently, reassessment proceedings were initiated by issuing notice u/s 148 dated 19.03.2018 and assessment was completed u/s 143(3) r.w.s. 147 denying the deduction u/s 80-IC on the ground that the assessee was not engaged in any manufacturing activity.

6. Feeling aggrieved by the order passed by the assessing officer the assess preferred the appeal before the learned CIT(A) but the Ld. CIT(A) has dismissed the appeal of the assessee by the impugned order.

3 Now feeling aggrieved by the order passed by the Ld. CIT(A) the assessee is in appeal before us. 7. During the course of hearing the Ld. AR submitted that the assessee was duly registered and licensed to manufacture Ayurvedic medicines, and the finished goods were approved proprietary Ayurvedic formulations. The assessee obtained manufacturing license from Department of Ayurveda, H.P., GMP certificate, and had also undergone regular inspections by AYUSH authorities.

7.1 It was submitted that the manufacturing process involved:

Pre-production: Sieving and drying of raw mushroom powder.  Filling: Capsule-filling through semi-automatic machines as per  prescribed doses (270mg for RG and 450mg for GL). Polishing: Polishing of capsules through dedicated machines.  Sorting/Inspection: Removal of defective capsules with QC testing.  Bottling, labeling, shrink wrapping, packing: All carried out under  controlled environment adhering to Schedule T of the Drugs & Cosmetics Rules. 7.2 Based on the abovementioned process, it was submitted that the assessee is engaged in the manufacturing activities of RG and GL capsules. To buttress his argument the assessee relied on the Madras High Court decision in DXN Herbal Manufacturing India Pvt. Ltd. dated 21.06.2018, wherein the Court observed: "...the final product emerges as commercially a distinct commodity that can be consumed as such, containing the requisite amount of ingredients in the appropriate percentage preserved in proper form as contained in the license issued under the authorized enactments. Hence, the commodity is said to have been manufactured..." 7.3 It was contended by the Ld. AR that the AO wrongly relied on statements of employees and factory inspection without allowing cross- examination, violating principles of natural justice. The Ld. AR submitted that the assessee may be given opportunity to cross examined the official of the 4 assessee and he relied upon the decision of the Hon'ble Supreme Court in the case of M/S ANDAMAN TIMBER INDUSTRIES vs COMMISSIONER OF CENTRAL EXCISE,KOLKATA-II in CIVIL APPEAL NO. 4228 OF 2006 7.4 The assessee also submitted that it was importing raw mushroom powder under Tariff Heading 3003.10, processing and converting it into a marketable dosage form. The transformation from bulk powder into regulated, consumable capsules constituted manufacturing under the definition provided in various statutes and judicial interpretations including: Commissioner of Central Excise vs. Johnson & Johnson Ltd. (2005)  188 ELT 467 (SC) Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323 (SC)  India Cine Agencies v. CIT [2008] 17 SCC 385  Arihant Tiles & Marbles v. ITO [2010] 320 ITR 79 (SC)  7.5 On the basis of the above said submission it was submitted that the appeal of the assessee is required to be allowed.

9.1 The Ld. AO has carried out a physical inspection of the premises, recorded statements of key personnel, and reviewed the processes followed. During the inspection, it was brought to the attention of the Ld. AO, which are available at pages 6 to 12 of the assessment order, indicate that no manufacturing activity was going on in the premises of the assessee. The Assessing Officer had examined the record and thereafter had written the finding at page 18 to 20 of the assessment order in the following manner:

The AO on verification of manufacturing and trading account and on the spot inspection of the factory premises has noticed that the assessce is only FILLING mushroom powder in the gelatin capsules shells without involving any manufacturing process in the raw material purchased. During the site visit it was found that no plant and machinery is installed related to the manufacturing activities. It was noticed by the AO that there is no value addition, no change in the quality and nature of finished product. In fact, all properties of raw material and finished product is found identical. The AO also found on the enquiry made that most of the purchases are from parent company which are sold to its sister concern. In this way the assessee diverted its taxable profit to its exempted concern. Therefore, on account of these facts the deduction claimed was disallowed. The AO not only the inspected the premises but also recorded the statement. On perusal of the statement it was noticed that manufacturing activities have been started from the next F.Y. in Orissa. It clearly shows that at present no 6 manufacturing activities is being carried out on the premises. The AO further correlated all the findings of the visit as well as the pictures taken and mentioned in the assessment order and statement recorded with the written submission filed by the assesses The AO established from the details of stock and purchase that all the already process powder were being purchased and kept with it as a closing stock. Only activities for FILLING of the Capsules from the premises were being done. The assessee has not claimed any change in the process or facts; hence, the facts are applicable in this case also. g) After going through judgement of the Hon’ble High Court of Madras Dt. 21/06/2018 it is observed that judgement was given by the Hon’ble Court belongs to the M/s DXN Herbal Manufacturing (India) Pvt. Ltd. The facts and legal position of the case may be different in different cases. In the absence of evidence of similarity the above decision of Hon'ble High Court of Madras cannot be applicable in this case. Further there are different views taken by the different Hon'ble High Courts on the similar issues by examining the facts and circumstances. Recently claim on the basis of substantial expansion made by existing entity already claiming deduction u/s 801C allowed by the Hon'ble high Court of Himachal Pradesh but the same was reversed by the Hon’ble Supreme Court. Further the assessee was issued and served a show cause asking as to why, deduction u/s 801C may not be disallowed by observing the facts that assessee has not proved manufacturing activity. In reply Dt. Assessee furnished detailed reply annexed at Annexure 2 h) It is clear from the reply to the show cause that nothing new was stated by the assessee but repeated the same story. In view of the above facts, circumstances, evidences, and observations, being not satisfied about the correctness and completeness of the deduction claimed by the assessee u/s 80IC of the IT Act, 1961, deduction of Rs.3,43,34,501/-i.e (3,60,35,565/- 17,01,064/- gain claimed from foreign currency rate fluctuation) claimed by the assessee is being disallowed and added back in the taxable income of the assessee. I have reason to believe that the assessee has furnished inaccurate particulars of its income, therefore penalty proceedings under section 271(1)(c) of the I.T. Act are also initiated. i) Further the assessee claimed other income of Rs. 17,01,064/- on which assessee also claimed deduction u/s 801C. The assessee was asked to justify the said income claimed as deduction. In reply, assessee stated that the income of Rs. 17,01,064/- is gain on foreign currency rate fluctuation. Assessee further stated that the gain on foreign currency gain is business related gain. By no stretch of imagination, the other income may be considered as having been carved from the manufacturing activities of the assessee. Therefore, the assessee's claim prima facie not allowable on other income, further, assessee has not given any satisfactory explanation to justify its claim of deduction u/s 80-IC on other income. I have reason to believe that the assessee is has furnished inaccurate particulars of its income, therefore penalty proceedings under section 271(1)(c) of the I.T. Act, are also initiated. 9.2 The assessee during the appellate proceedings had reiterated the earlier stand; however, the Ld. CIT(A) has conducted the inquiry under section 250(4) of the Act and issued the notices to the assessee. The notice issued to the assessee is part of the CIT(A) order, as shown on page 33, in 7 compliance to the notice dt. 28/11/2023 the assessee has not responded and thereafter one more notice dt. 21/12/2023 however no response was given thereto and lastly the assessee submitted the reply on 07/02/2024. It was noted by the Ld. CIT(A) in the order that the assessee has not provided a specific reply to the question raised by the Ld. CIT(A). For the ready reference, we are reproducing herein below the six questions asked by the Ld. CIT(A) which are as under: "1. In the assessment order the A. O. has given findings that on inspection of the premise at 120 DIC Industrial Area, Baddi, Himachal Pradesh, it was found that the company is simply filling the mushroom powder in empty capsules and no other manufacturing/production process or other activities are being carried out from this premise. Thus not a single manufacturing/production process has been done in the said factory premise at Baddi which can be called as manufacturing activity. It is further found by the A.O. that the said unit is simply a hall and not a single machine is found installed in this unit for carrying manufacturing activity. A picture of this room/manufacturing/production unit is also pasted by the A. O. at page-9 of the assessment order.

8 6. This information is sought u/s. 250(4) of the 1. T. Act".

9.3 As the assessee failed to submit the reply based on the documents, the Ld. CIT(A) had decided the issue against the assessee in paragraphs 7.17 to 7.18 as under: 7.17 In the said inquiry notice issued u/s. 250(4) of the I. T. Act the appellant was specifically asked to prove with support of authentic documentary evidences that all the machineries as appearing in the fixed asset scheduled list of which provided by the appellant during the course of appellate proceedings (total of 61 machineries) have been installed at its factory unit at 120 DIC Industrial Area. Baddi. Solan, Himachal Pradesh and used for manufacturing / production activity of Reishigano and Genocilium Capsules. The appellant has not provided any written submission or documentary evidences to show that all the machineries (total 61) have been installed at its business premise at 120 DIC Industrial Area, Baddi, Solan, Himachal Pradesh. This reinforce the finding given by the A.O. on his inspection of the appellant's said manufacturing unit that the said unit is simply a hall and not a single machine is found installed in this unit for carrying manufacturing activity. Thus it is proved that no actual manufacturing/production process or other activities are being carried out from its premise. Thus not a single manufacturing/production process has been done in the said factory premise at Biddi which can be called as manufacturing activity. 7.18 The appellant has also not offered any comments or denial on specific query raised in the enquiry notice u/s. 250(4) of the I. T. Act that in the statement recorded Mrs. Minikshi Sharma, Asst. Manager, HR of the company informed that the processing of mushroom powder is done at the premise of M/s. Daxen Agritech in Orissa which is a branch of the appellant company. Therefore considering ne above facts of the case, it is beyond doubt that no manufacturing/ production of Raishigano Capsules and Genocelium Capsules is being carried out by the appellant company at 120 DIC, Industrial Area, Baddi, Distt. Solan, Himachal Pradesh. 9.4 The Ld. CIT(A) , had also distinguished the decision of the Hon'ble High Court of Madras in paragraph 7.21 in the following manner:

7.21 Thus the decision of Hon'ble High Court Chennai is mainly based on the fact that none of the three lower authorities i.e. A.O., CIT(Appeal) and Hon'ble Tribunal had made an attempt to examine as to whether the process termed by the assessee would tantamount to manufacture and that the submission made by the assessee explaining the process of manufacture has been out rightly rejected by these three lower authorities. As against this in the instant case it is evident from the assessment order that the A.O. has brought sufficient evidence on record in the nature of finding of facts gathered during the course of his visit to the appellant's manufacturing unit at 120, DIC Industrial Area. Baddi, Solan Himachal Pradesh that appellant's said manufacturing unit is an empty hall without any machine' les being installed which shows that no manufacturing activity is being carried out at appellant's said premise. Further recording of statement on oath u/s. 131 of the I. T. Act of the appellant's employees Mr. Vivek Kashyap, Production In-charge and Shri Himanshu Shekhar, Finance / Accounts head of the appellant company who admitted before the A.O. that the appellant company is only carrying out the activity of filling mushroom powder into empty gelatin capsules. The A.O. also gathered samples of raw materials and finished products of the appellant company and got it examined from the state forensic science laboratory, Shimla to ascertain whether the finished product said to have been manufactured by the appellant company i.e. Hishigano (RG) and capsule Ganoceilium (GL) is a separate and distinct from the raw material used. The A.O. has also given findings that on inspection of the appellant's manufacturing unit at 120 Industiral Area, Baddi. HP it was found that not a 9 single plant and machinery was found installed. The A.O. also brought on record the fact that in the statement recorded on oath u/s 131 of the I. T. Act of Minikshi Sharma, Asst. Manager, HR, it came to light that the appellant is not engaged in the activity of manufacture of said Rishigano (RG) and capsule Ganoceilium (GL) but the same is got processed (or even if it is called manufactured) from its related concern M/s. Dexon Agrotech at Orissa. Thus since the A.O. has brought all these relevant evidences on record it cannot be said that in this case the A.O. has not made an attempt to examine as to whether the process done by the assessee would tantamount to manufacture and the process of manufacture described by the appellant has been outrightly rejected by the Assessing Officer. Therefore, with due respect, the ruling given by the Honble High Court in the above said case law relied upon by the appellant do not apply to the appellant's case.

9.5 The ld.AR, though, had argued vehemently and forcefully that the assessee is into manufacturing activities and the case of the assessee is covered by the Hon’ble Madras High Court. However, we noticed that the assessee has measurably failed to produce any evidences showing that sixty one machines have been installed at the factory premises of the assessee and were used for manufacturing / production of the Reishigano and Genocilium Capsules. The abovesaid finding is further fortified by the statement recorded by the Assessing Officer of the Assistant Manager. The assessee had further failed to rebut before lower authorities that processed was being done at its related concern M/s. Dexon Agrotech at Orissa.

9.6 Based on above we are unable to appreciate how the mere act of packing pre-processed mushroom powder into gelatine capsules, without any chemical transformation, blending, or value addition resulting in a new or distinct product, can be regarded as ‘manufacture’ or ‘production’ of an article or thing. In our considered opinion, to qualify as manufacturing under Section 80-IC of the Act, there must be a transformation—either in the chemical composition or physical properties—of the input product, rendering it a commercially distinct commodity. The mere labelling, repackaging, or capsule-filling exercise, in the absence of any substantial change in the character, composition, or intended use of the product, cannot be said to constitute ‘manufacturing’ or ‘production’.

It is pertinent to reiterate that the incentive under Section 80IC has been introduced to promote genuine manufacturing activities involving the 10 application of industrial processes and technology, and not to extend benefits to mere packers or handlers of finished goods. The essential test is whether a commercially different product comes into existence. To draw a simple analogy, repacking 100 kg of sugar from a gunny bag into 100 gm pouches does not amount to manufacturing; it remains sugar in both form and function. Granting the benefit of Section 80-IC in such circumstances would defeat the legislative intent and amount to a misuse of a beneficial provision meant to promote industrial growth in notified regions. Therefore, in our respectful view, the activity undertaken by the assessee does not satisfy the condition of ‘manufacture’ or ‘production’ of an article or thing as envisaged under the said section. The definition of "manufacture" as per Section 2(29BA) of the Act requires the transformation of a new and distinct object having a different name, character, and use. In the present case, the chemical composition of the raw material and final capsule remained the same. Merely facilitating consumption through capsule form does not qualify as "manufacture" under the Act.

9.7 The reliance placed by the assessee on licenses issued under Drugs & Cosmetics Act, 1940 or AYUSH certifications cannot override the statutory requirement under the Income-tax Act. The Income Tax law has its own definition and tests to determine whether an activity constitutes manufacturing or not.

9.8 We find that the reliance placed by the assessee on the decision of the Hon’ble Madras High Court is misplaced and not applicable to the facts of the present case. It is pertinent to note that the said decision was rendered in a context where the Hon’ble Court did not have the benefit of examining the definition of “manufacture” as specifically introduced under Section 2(29BA) of the Income Tax Act, 1961, which came into effect subsequently or in other words the issue before the Hon’ble High Court was prior to 2009 and therefore the High Court was not having the benefit of dwelling into the definition given in the statute. Further, the factual matrix before the Hon’ble High Court did not include contemporaneous evidence such as inspection reports or 11 statements from on-site staff or the evidence that the process of the mushrooms powder was done at Orissa, and in the absence thereof, the finding given by the Hon'ble High Court cannot be applied to the facts in hand.

9.9 There is no gainsaying that the applicability of a judicial precedent is contingent upon similarity in facts, law, and the assessment year involved. A judgment, though binding, is not to be treated as a statute; it must be applied with circumspection, particularly where material distinctions exist in respect to the fact on record. The Hon’ble Supreme Court has consistently held that a precedent cannot be relied upon unless it is shown that the factual and legal background is pari materia similar with the case under adjudication.

Accordingly, in our considered opinion, the decision relied upon by the assessee does not advance its case and is distinguishable on facts as well as on legal footing. Therefore, the said precedent is held to be inapplicable to the present appeal.

9.10 The Ld. AR, as a last resort, urged before us that the matter may be remanded to the file of the lower authorities on the ground that the assessee was not afforded an opportunity to cross-examine the officials whose statements formed the basis of the adverse findings. This plea was strongly opposed by the Ld. Departmental Representative, who submitted that adequate opportunity had already been provided to the assessee at multiple stages of the proceedings.

9.11 We have carefully considered the rival submissions and perused the material available on record. It is an undisputed fact that despite issuance of multiple notices by the Learned CIT(A), the assessee failed to produce any credible or contemporaneous evidence to substantiate its claim that any manufacturing activity was carried out at its premises. No documentary proof was furnished to establish that the 61 machines claimed to have been 12 installed were in actual use or that any value-added processing was carried out at the assessee’s unit, rather than at its sister concern located in Orissa. It is further noted that the Assessing Officer and the CIT(A) had provided the assessee with the details of the machinery, findings of the on- site inspection, and statements recorded under section 131 of the Act. However, the assessee did not make any meaningful attempt to controvert these findings with cogent material or seek cross-examination of any specific person whose statement may have been relied upon. No request was made identifying the witnesses or stating the purpose and relevance of such cross- examination. In our considered opinion, the right to cross-examination in income-tax proceedings is not absolute and must be exercised with specificity and purpose. The strict provisions of the Indian Evidence Act do not apply to income-tax proceedings; however, when a party seeks to invoke the right to cross-examination, it must clearly demonstrate the necessity and relevance of such an exercise.

The core issue in this appeal pertains to the eligibility of the assessee for deduction under Section 80IC of the Income Tax Act. The primary onus to establish that the assessee was engaged in the manufacture or production of an article or thing, within the meaning of Section 80IC read with Section 2(29BA) of the Act, lies squarely on the assessee. This onus is required to be strictly discharged through tangible and reliable evidence. In the present case, the assessee has miserably failed to discharge this primary burden. In view of the absence of any satisfactory explanation or proof of manufacturing activity, an adverse inference is warranted and justified against the assessee.

Accordingly, we uphold the disallowance of the claim for deduction under Section 80IC made by the lower authorities.

9.12 While we acknowledge that the right to cross-examination constitutes a vital component of the principles of natural justice, it is well-settled that such a right is neither absolute nor invariable. The Hon’ble Supreme Court, in 13 Union of India v. T.R. Varma [AIR 1957 SC 882], has categorically held that unless it is established that prejudice has been caused due to denial of cross- examination, the proceedings would not stand vitiated. Furthermore, we are of the opinion that a mere technical plea of denial, without substantiating actual prejudice, and actual request before the lower authorities is insufficient to invalidate the assessment.

In the present case, all material evidence and relevant documents were duly furnished to the assessee, and ample opportunity was afforded to respond. The plea for cross-examination has been raised for the first time before us and was neither urged at the assessment stage nor before the Ld. CIT(A). Notably, the statement in question was recorded from the Manager of the assessee who was working at the relevant time and thereafter, however, no affidavit or written denial has been placed on record to controvert the correctness of the statement recorded by the Assessing Officer during the spot inspection. Furthermore, no specific application or written request was made by the assessee during the lower proceedings seeking cross-examination of the said person. In such a scenario, where the assessee was in possession of both the evidence and the opportunity and yet chose not to act, the subsequent insistence on remand solely for the purpose of cross-examination—without any substantial rebuttal—appears to be an afterthought and would serve no useful purpose. It would amount to a procedural formality devoid of any merit or consequence.

9.13 In view of the foregoing discussion, we do not find any merit in the assessee’s request for remand solely on the ground of denial of cross- examination. The plea raised at this belated stage pertaining to cross- examination of its own employees, whose identity, background, and current status remain uncertain—lacks substance and is accordingly rejected. 9.14 Having regard to the totality of the facts on record, including the findings of the Assessing Officer during the spot inspection and the failure of the assessee to produce any cogent evidence in support of manufacturing 14 activity or utilization of the machines claimed to be installed, we are of the considered opinion that the assessee was not engaged in any manufacturing activity during the relevant period. Accordingly, we hold that the assessee is not entitled to deduction under Section 80-IC of the Income-tax Act, 1961.