ASST.C.I.T., BELLARY vs. M/S HOTHUR TRADERS 100% EOU, BELLARY

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH “C”

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA No.20/Bang/2015 ITA No.32/Bang/2016 (Asst. Years 2010-11 & 2011-12) The Asst. Commissioner of Income-tax, Circle-1, Bellary. . Appellant Vs. M/s Hothur Traders 100% EOU, No.85,6,7&8, Infantry Road, Cantonment, Bellary. . Respondent PAN –AAEFH7705H. CO No.55/Bang/2016 (By assessee) Appellant by : Shri Nagendra Prasad, CIT Respondent by : Shri B.S Balachandran, Advocate Date of Hearing : 22-11-2017 Date of Pronouncement : 19-01-2018

O R D E R PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER : These are two appeals by the Revenue for asst. years 2010-11 and 2011-12 directed against the orders of the CIT(A), Gulbarga

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 2 dated 23/10/2015 and 30/11/2015 respectively. The assessee has filed cross-objections (‘C.O’) for asst. year 2011-12. Since the issues in these appeals are substantially similar, they were heard together and are being disposed off by way of this common order. 2 Briefly stated, the facts of the case relevant for disposal of these appeals are as under:- 2.1 The assessee, is a firm engaged in the business of purchase of iron ore in its prime condition, conversion of the same into seized ore, calibrated ore and iron ore fines by usage of its own plant and machinery like crushers, screening plants, etc., and the finished products so obtained are sold/exported. In its returns of income for asst. years 2010-11 and 2011-12, the assesee claimed deduction u/s 10B of the Income-tax Act, 1961 (in short ‘the Act’). The Assessing Officer (‘AO’) was however of the view that since the assessee is only involved in the processing of iron ore and exporting the same and disallowed the deductions of Rs.21,80,85,947/- and Rs.21,05,84,355/- claimed by the assessee u/s 10B of the Act for asst. years 2010-11 and 2011-12 respectively. The assessments were accordingly completed u/s 143(3) of the Act vide orders dated 15/3/2013 and 30/3/2014. On appeal, the ld CIT(A) Gulbarga vide order dated 23/10/2015 and 30/11/2015 for asst. years 2010-11 and 2011-12, held that the assessee satisfied the specified conditions and therefore allowed the assessee’s claim of deduction u/s 10B of the Act. 3.1 Aggrieved by the orders of the ld CIT(A), Gulbarga dated 23/10/2015 and dated 30/1/2015 for asst. years 2010-11 and 2011-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 3 12, Revenue has preferred these appeals wherein it has raised the following similar grounds (grounds of asst. year 2010-11 are extracted):- “1. The order of the C1T(Appeals) Is opposed to law and facts of the case. 2. The CIT(Appeals) erred in deleting the additions of Rs.2180,85,947 added In the assessment. 3. The CIT(Appeals) ought to have appreciated the facts narrated by the Assessing Officer in the Assessment Order that the assessee has not fulfilled conditions specified in Section 10B of I.T. Act for claiming exemption under the said section. The CIT(Appeals) ought to have appreciated the facts that the assessee has failed to fulfill the conditions as laid down In Section 10A/10B of IT. Act, which ultra vires of the Income-Tax Act. 4. For these and other grounds that may be urged at the time of hearing it is rayed that the order of the Commissioner of Income-Tax (Appeals) may be vacated and that of the assessing officer be restored. 5. The appellate craves, leaves to add, to after, to amend or delete any of the on or bore hearing of appeal.”

3.2 For asst. year 2011-12, the assessee has raised the following grounds in its cross-objections:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 4 “1. The order of the Id. Commissioner of income tax (appeals ) is opposed to the facts and law, in so far it is prejudicial to the assess- appellant. 2. The appeal of the appellant is liable to be dismissed as none of the grounds taken by the appellant is maintainable on facts and in law. 3. The Learned Commissioner of Income- tax(Appeals) erred in confirming the disallowance of Rs.9,32,360/- and Rs.55,29,200/u/s.40(a)(ia) of the Act. 4. The respondent assessee craves leave to add , to alter, to amend or to delete any of the grounds of cross objections , and to file written submissions and paper book at the time of actual hearing before the Hon'ble ITAT.”

3.3 The issue raised in Revenue’s appeals (Supra) is with respect to the assessee’s claim of deduction u/s 10B of the Act. The grounds raised merely mention that the assessee has not fulfilled the conditions specified in sec. 10B of the Act, without specifying which of the conditions are not fulfilled. 3.4 A perusal of the order of assessment indicates that the AO had rendered a finding that the assessee does not fulfill the conditions specified u/s 10B of the Act for claiming deduction thereunder, mainly for the following reasons:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 5 (i) The assessee firm had merged with another existing firm and therefore it amounts to re-construction of an existing business and usage of old plant and machinery, thus disentitling the assessee to the benefits of deduction u/s 10B of the Act. (ii) The activities of the assessee do not qualify to be ‘manufacture’ or ‘production’ as envisaged in section 10B of the Act. 3.5 On appeal, the ld CIT(A) allowed the assessee’s contentions on both the above issues/views raised by the AO. As regards issue (i) above, the ld CIT(A) relied upon the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009- 10 in ITA Nos.1044 & 1045/Bang/2012 dated 7/3/2014 and other judicial pronouncements to hold that the activities of the assessee satisfies the conditions specified in the section. As regards issue (ii) above, the ld CIT(A) relied on the decision of the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10 (Supra) and other judicial pronouncements to hold that the activities of the assessee can be regarded as ‘manufacture’ or ‘production’ as envisaged in the section and therefore the assessee satisfies the conditions specified in this regard. 3.6 Aggrieved by the aforesaid findings in the impugned orders of the ld CIT(A), Revenue is in appeal before us. In the course of hearings, the ld DR for Revenue strongly assailed the orders of the ld CIT(A) and supported the findings rendered by the AO. In support of revenue’s contentions, the ld DR placed reliance on the decision of the co-ordinate bench in the case of ILC Industries Ltd., in ITA No.767 to 771/Bang/2014 for asst. year 2011 and ITA Nos.1008 &

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 6 1009/Bang/2015 for asst. years 2004-05 & 2007-08, submitting that on similar set of facts, it has been held that the business of trading in iron ore does not qualify for deduction u/s 10B of the Act. 3.7 Per contra, the ld AR supported the findings rendered by the ld CIT(A) in the impugned orders and relied on the decision of the co- ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10 (Supra) in support of the assessee’s claim of deduction u/s 10B of the Act. Reliance was also placed on another decision of the ITAT, Panaji Bench in the case of ACIT Vs. Ramacanta Velingkar Minerals in ITA Nos.21 & 22/PNJ/2014 for asst. year 2008-09 and 2009-10 dated 30/5/2014 which are stated to be on similar set of facts as the case on hand. 3.8.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The basic facts related to the assessee are not in dispute. The assessee, a firm was established on 5/10/2007. Another firm, M/s Sharmeen Transport Co. (‘STC’) merged with the assessee firm on 11/5/2008, as per the merger order given by the Central Excise Authorities. Pursuant to the merger, the existing assets of ‘STC’ became the assets of the assessee firm . The partners of both the firm were the same with the same profit sharing ratio. 3.9 Issue (i) Reconstruction of Business 3.9.1 In the course of assessment proceedings, the AO took the view that under the proviso to sec. 10B of the Act, the conditions for claiming exemption are that:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 7 (i) the undertaking should not be formed by splitting up or re- construction of business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant used previously for any purpose; and (iii) the value of the second hand machinery or plant transferred to a new undertaking should not exceed 20% of the total value of machinery or plant used for the industrial unit. 3.9.2 The AO was of the view that due to the merger, the above conditions stipulated in sec. 10B of the Act are violated and therefore the assessee was not eligible to claim deduction u/s 10B of the Act. Per contra, the contentions of the assessee was that both the concerned firms have 100% EOU undertakings and but for the merger, the profits of from the 100% EOU would have been exempt in the hand of each of the two firms separately and therefore just became the above two firms merged, deduction u/s 10B of the Act cannot be denied. It was also contended that by reason of the merger, it cannot be said that the assessee is formed by the splitting up or reconstruction of a business already in existence. 3.9.3 We find that this issue has been decided by the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009- 10, wherein at paras 11 to 33 thereof it has been held as under:-

“11. We have heard the rival submissions. An identical issue had come up for consideration before this Tribunal in the case of DCIT v. Trident Minerals (100% EQU) in ITA No.1050/Bang/2012 for the A.Y. 200910, order dated

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 8 07.02.2014. In that case on identical facts, this Tribunal held that the assessee was entitled to deduction u/s. lOB of the Act. The observations of the Tribunal were as follows:- 6.4.1 We have heard both parties at length and perused and carefully considered the material on record including the orders of the authorities below, submissions made, judicial decisions cited etc. From an appreciation of the facts on record, it is not in dispute that the unit of the assessee firm is a 100% EOU unit entitled for deduction under-section 10B of the Act. It is also seen that the Assessing Officer has not disputed the EOU status of the unit of M/s. KMMI Exports also. The issue for consideration is after the merger of the firm M/s. KMMI Exports with the assessee firm, whether the assessee firm is entitled for deduction under section 10B of the Act or not. 6.4.2 On careful consideration, we do not concur with the view of the Assessing Officer that the Law recognizes merger of only companies and not the merger of firms. Earlier, there was subsection 9 to section 10B of the Act which specifically provided and that the deduction shall not be allowed if there was a transfer of ownership or beneficial interest in

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 9 the undertaking. This subsection 9 of section 10B of the Act was omitted from the Statute w.e.f. 1.4.2004. Another sub-section 9A of section 10B of the Act was introduced w.e.f. 1.11.2003, which provided that the deduction can be allowed if a firm is succeeded by a company. This sub-section was also omitted w.e.f. 1.4.2004. In this view of the matter, the inevitable and appropriate conclusion is that the limitations specified in sub-sections 9 and 9A of section 10B of the Act do not exist from 1.4.2004 and therefore the conclusion of the Assessing Officer that deduction under section 10B of the Act cannot be granted on the merger of firms is not correct.

6.4.3 It is a settled principle, upheld by various judicial decisions, that deduction under section 10B of the Act is granted to an undertaking and not an assessee. Further, the CBDT Circular No.1/2013 in F.No.178/84/2012 dt.17.1.2013, relied on by the assessee, is clear that the deduction is granted to the undertaking. Therefore, it follows that as long as the undertakings remain eligible for deduction under section 10B of the Act, the deduction

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 10 cannot be denied merely on the ground that there has been a merger of the firms which own the undertakings. We also find that the Assessing Officer has not rendered any finding that either of the units, one belonging to the assessee and the other belonging to the firm that got merged i.e. KMMI Exports, is not eligible for deduction under section 10B of the Act. The only reason adduced is that due to the merger of the two units, the assessee is deploying assets already put to use by the merged firm and hence the assessee cannot claim deduction under section 10B of the Act. As elaborately discussed above, both the units / undertakings of the assessee firm and MIs. KMMI Exports are otherwise eligible for deduction under section 1 OB of the Act and the deduction is towards the undertaking. As long as the undertakings are eligible for deduction under section 10B of the Act, which has not been disputed by the Assessing Officer, the merger of the firm, MIs. KIN'[IVII Exports with the assessee does not alter the status of the undertakings. In this view of the matter, we uphold the order of the learned CIT (Appeals) in allowing the assessee deduction under

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 11 section 10B of the Act. Accordingly, Revenue's grounds at S.Nos.2 and 3 are dismissed. Since the assessee's C.O. at S.Nos.1 to 4 support the order of the learned CIT (Appeals) in allowing it deduction under section 10B of the Act and which have been addressed by our dismissal of the aforesaid grounds raised by revenue on this issue, there is no requirement to adjudicate C.O's of the assessee as they are rendered infructuous."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 12 13. The contravention of conditions mentioned in section 10B(2)(ii) and (iii) referred to by the AO in the case of HI is again without any basis. This finding of the Assessing Officer is totally erroneous and contrary to law. The Assessing Officer has ignored the legal position and proceeded to hold that the assessee contravened sections 1OB(2)(ii) & (iii) of the Act. It should be noted that the HT and STC are firms. The provision applicable for merger of firms is contained sections 170 & 188 of the Act. If only this provision had been appreciated and the judgments on the issue examined, such an erroneous finding would not have culminated. The following table would highlight this issue:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 13 14. It must be remembered that the expression "formed" as used in and (iii) of the Act and the expression "Succession" as understood in Sec. 188 & 170 of the Act have definite meanings as explained in judicial pronouncements referred to by the learned counsel for the Assessee before us. In 196 ITR 188 (SC) Bajaj Tempo Ltd., Vs, CIT 196 ITR 188 (SC), the Hon'ble Supreme Court observed that lease of properties cannot be said to be formation. The following were the relevant observations. "10. The initial exercise, therefore, should be to find out if the undertaking was a new one ....... The emphasis is on formation not on use. Therefore, it is not every transfer of building or material but the one which can be held to have resulted in formation of the undertaking Even, though this decision was concerned with the clause dealing with reconstruction of an existing business, the expression "not formed" was constructed to mean that the undertaking should not be a continuation of the old but emergence of a new unit. Therefore, even if the undertaking is established by transfer of building, plant or machinery but is not formed as a result of such transfer, the assessee could not be denied the benefit

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 14 11. ......Yet what is significant is that the High Court did not examine the impact of the word "formed". It proceeded on the basis P1 that once the lease amounted to a transfer, the assessee became ineligible from claiming any exemption." 15. In CIT Vs. K.H. Chambers 55 ITR 674(SC), it was held: "13 Succession involves change of ownership; that is, the transferor goes out and the transferee comes in; it connotes that the whole business is transferred; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the totality of succession."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 15 16. Applying the ratio laid down in the aforesaid cases, we can safely conclude that in the present case there was no formation of a new undertaking but it was a case of succession and therefore the provisions of Sec.10B(2)(ii) & (iii) of the Act, sought to be applied by the AO, did not apply 17. We may also add that the merger in the present case is akin to a slump sale of the business of 100% EOU. In the case of slump sale, the Tribunal as well as High Courts have taken a view that the transferee is entitled to deduction u/s. 1OAI1OB of the Act. 18. The Finance Act, 2000 substituted the then existing section 10/\ w.e.f. 1st April, 2001. The provisions so substituted, in so far as it is relevant to the present case read thus:-

"10A. Special provision in respect of newly established undertakings in free trade zone, etc.-(l) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an 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 such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 16 Provided that ..... Provided that...... Provided that...... Provided also that ......... (2) This section applies to any undertaking which fulfils all the following conditions, namely-:- (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 3313, in the circumstances and within the period specified in that section;

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 17 (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.- The provisions of Explanation I and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub- section."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 18 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 cl. (ii) of this sub- section, the condition specified therein shall be deemed to have been complied with."

"(9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. Explanation I.-For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of the voting power on the last

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 19 day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking. Explanation 2.- ........

"21 .3 Sub-section (9) provides that where during any previous year, the ownership or beneficial ownership interest in the undertaking is transferred, the benefit of the deduction would not be allowed for that year and subsequent years. An Explanation applicable in cases of companies further provides that where 51 % of shares are not beneficially held by persons, who held these shares at the time of setting up of the unit, it will be deemed to be a transfer of ownership. 21.4 Owing to difficulties in monitoring change in shareholding pattern in listed companies in which the public are substantially interested, the amendment provides that the provisions of subsection (9) would not be applicable in the case of a company where its shareholding undergoes any change as a result of its becoming a company in which public are substantially interested. The proviso would also not

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 20 be applicable to a company in which public are substantially interested at the time of setting up of the undertaking. In other words, the proviso will not apply to companies in which public are substantially interested either at the time of setting up or later on its becoming a company in which public are substantially interested. The proviso also applies to any change in the shareholding pattern of any venture capital company or a venture capital funds, which have to ncessari1y disinvest at some stage."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 21 23. The following amendments were made in section 10A by Finance Act, 2002 w.e.f. 1st Apr'.], 2003, namely :- "after sub-section (9) and before Explanation 1, the following shall be inserted, namely

"(9A) Notwithstanding anything contained in sub- section (9), where as a result of reorganization of business, a firm or a sole proprietary concern is succeeded by a company and the ownership or beneficial interest in the undertaking of the firm or the sole proprietary concern is transferred to the company, the deduction under sub-section (1) in respect of such undertaking shall be allowed to the company, as the same would have been allowed to such firm or sole proprietary concern, as the case may be, if the reorganization had not taken place: Provided that,- (a) In the case of a firm, the aggregate of the shareholding in the company of the partners of the firm is not less than fifty one per cent, of the total voting power in the company and their shareholding continues to be as such for the period for which the company is eligible for deduction under this section; (b) in the case of the sole proprietary concern, the shareholding of the sole proprietor in the company is not less than fifty-one per cent of the total voting

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 22 power in the company and his shareholding continues to remain as such for the period for which the company is eligible for deduction under this section:".

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 23 26. The CBDT in Circular No.7 dated 5.9.2003 explained the above amendments in the following words: "21. Allowing deduction under sections 10A and 10B to the resulting entity in the case of amalgamation or demerger. 21.1 The deduction under sections 1OA and 10B, are not allowed to the assessee where the Ownership or the beneficial interest in the undertaking is transferred by any means, due to the provisions of sub-section (9) of section 1OA and sub- section (9) of section 1OB. However, this condition is not applicable in certain cases, such as where a firm or sole proprietary concern is succeeded by a company as a result of the reorganization of the business, or where as a result of change in ownership, the resultant entity is a public limited company or a venture capital company.

21.2 With a view to give boost to the export-led growth, and to eliminate the hurdles in the Mergers and Acquisitions (M&A) and other modes of business restructuring, a new sub-section (7A) in section 10A and a new sub-section (7A) in section 10B have been inserted to provide that where an undertaking of an Indian company is transferred to another company under a scheme- of amalgamation or demerger, the deduction shall be allowable in the hands of the amalgamated or the resulting company. However no deduction shall be admissible under this section to the amalgamating company or the demerged company for the previous year in which amalgamation or demerger takes place. As

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 24 a consequence, sub-sections (9), (9A) and the Explanation below thereto in sections 10A and 10B, become redundant and have been omitted. 21.3 The amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 20042005 and subsequent years." (emphasis supplied)

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 25 a view to give boost to the export-led growth, and to eliminate the hurdles in the Mergers and Acquisitions (M&A) and other modes of business restructuring, and to allow the deduction u/s.10A of the Act in the case of Amalgamation and demerger in the hands of the amalgamated or the resulting company, except for the previous year in which amalgamation or demerger takes place.

"EXPORT INCENTIVE Section 1OA, 1OAA & 10B of Income Tax Act, 1961 The Indian Software Industry has been the beneficiary of direct tax incentives under the provisions like Sections 10A, 10AA & lOB of the Income -tax Act, 1961 in respect of their profits derived from the export of computer software. These provisions prescribe incentives to 'units" or "undertakings", established under different schemes, which are/were deriving profits from export of computer software subject to fulfilling the prescribed conditions.

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 26 2. It has been represented by the software companies that several issues arising from the above mentioned provisions are giving rise to disputes between them and the Income-tax authorities leading to denial of tax benefits and consequent litigation and, therefore, require clarification. Various issues highlighted by the Software Industry have been examined by the Board and the following clarifications are hereby issued - (i)..... to (iii)......

(iv) WHETHER TAX BENEFITS UNDER SECTIONS 1OA, 1OAA AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF A SLUMP-SALE OF A UNIT/UNDERTAKING.

The vital factor in determining the above issue would be facts such as how a slump-sale is made and what is its nature. It will also be important to ensure that the slump sale would not result into any splitting or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 27 ownership of an undertaking, the claim of exemption cannot be denied to an otherwise eligible undertaking and the tax holiday can be availed of for the unexpired period at the rates as applicable for the remaining years, subject to fulfillment of prescribed conditions."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 28 assessee made a claim for deduction under Section 10A as it then stood. One of the reason assigned by the AO for rejectinq The Assessing Officer rejected the claim under Section 10A was that the Assessee was formed by splitting up or reconstruction of a business already in existence and that it was formed by the transfer to a new business of plant and machinery previously used for any purpose. The Tribunal has held that the entire software division was transferred as a going concern by an agreement dated 19 October 1994 to the assessee. The Tribunal observed that it was an admitted fact that the undertaking of the software division which was hitherto owned by IOCL was transferred on a going concern basis together with its assets and liabilities to the assessee. The Tribunal relied upon a decision of the Hon'ble Bombay High Court in CIT vs. Gaekwar Foam and Rubber Company Ltd (1959) 35 ITR 662 in which a distinction was drawn between reconstruction of a business and sale of the business and it was held that in the case of a sale there can be no question of reconstruction. This decision was approved by the Supreme Court in Textile Machinery Corporation Ltd. vs. CIT. (1977) 107 ITR 195. Reliance was also placed on a

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 29 Circular issued by the Board under the provisions of Section 84 stating that the benefit under the provision attaches not to the ownership of the undertaking but to the undertaking itself. On further appeal by the Revenue to the Hon'ble High Court, the Hon'ble High Court had to consider the following question raised by the Revenue, viz., "Whether conditions mentioned u/s 10A are fulfilled in the instant case". The Hon'ble High Court held :-

"11. The Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied. According to the Tribunal the benefit of Section 10A attaches to the undertaking and not to the assessee which owns the undertaking. The benefit of Section 10A was d to have attached itself to the STP unit of the software division which was owned by IOCL till 19 October 1994 and it was owned by the assessee subsequent to that date. What is material, according to the

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 30 Tribunal, is not who owns the undertaking but whether the undertaking is entitled to the benefit available under Section 10A. As regards the issue of transfer by IOCL to the assessee, the Tribunal noted that Section 10A(9) was substituted by the Finance Act 2000 with effect from 1 April 2002. Section 10A(9) provided that where during any previous year the ownership or beneficial interest in an undertaking of the business is transferred by any means, the deduction under sub section (1) shall not be allowed to the assessee for the Assessment Year relevant to such previous year and the subsequent years. The Tribunal noted that if a transfer between IOCL and the assessee were to be effected after 1 April 2001, that would result in the undertaking being disentitled to the benefit under Section 1OA. This was a pointer to the fact that prior to the substitution a transfer of ownership or beneficial interest in the undertaking would not disentitle an assessee to the benefit of Section 1OA. (As a matter of fact it may also be noted that the provisions of Section 10A(9) were

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 31 omitted by the Finance Act 2003 with effect from 1 April 2004). 12. The judgment of the Division Bench of this Court in Gaekwar Foam explains that the concept of a reconstruction of a business implies that the original business is not to cease functioning and its identity is not lost. Reconstruction is of a business already in existence and there must be a continuation of the activities and business of the same industrial undertaking. Where the ownership of a business or undertaking changes hands that would not be regarded as reconstruction. This judgment has specifically been approved by the Supreme Court in Textile Machinery Corporation (Supra). As regards the splitting up of a business, the relevant test is whether an undertaking is formed by splitting up of a business already in existence. Unless the formation of the undertaking takes place by the splitting up of a business already in existence, the negative prohibition would not be attracted. In the present case, the entire business of the software undertaking was transferred to the Assessee. The

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 32 undertaking of the Assessee was not formed by the splitting up of the business. 13. For the aforesaid reasons, the first question of law would have to be answered in the affirmative in favour of the assessee and against the Revenue."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 33 32. As far as the refusal of deduction u/s. lOB of the Act in the case of STC is concerned, we are of the view that there is no requirement that lOB unit should be in existence as on the last day of the previous year. This been the main plank of argument on the basis of which AO refused deduction u/s. 10B of the Act to STC. The view of the AO in this regard is erroneous and was rightly reversed by the CIT(Appeals).

3.9.4 As this issue has been decided by the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10 (Supra) in favour of the assessee and Revenue has not brought out any new facts/evidence to warrant any relook at the aforesaid decision, we concur with the order of the ld CIT(A) that the assessee satisfies the conditions for claiming deduction on this issue.

3.10 (ii) Do assessee’s activities constitute ‘manufacture’ OR ‘production’ 3.10.1 The other reason/issue in view of which the AO has denied the assessee benefit of deduction u/s 10B of the Act was that the assessee was not carrying on manufacturing activity. In this regard, the case of the AO as made out in the order of assessment is as follows:-

"Section 10B only provides incentives to industries engaged in only manufacture or production

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 34 of goods or articles or computer software and the Act does not use the word process and therefore industries engaged in the processing of goods or articles or debarred from the benefit of this section. The expression "manufacture" involves the concept of change effected to a basic raw material resulting in the emergence of or transformation into a new commercial commodity. Whether an article is converted into different article depends on several criteria and one of the essential tests is whether in the commercial sense, the original article as ceased to exist and a new article has taken its place. It is, however, not necessary that the original article or material should have lost its identity completely; all that is important is whether what has emerged as a result of the operation, is a different commercial commodity, having its name, identity, character and end use. [Arthur v. Newell vs. CIT (1997) 223 ITR 776 (AAR)].............. On perusal of the records, it is reveals that the assessee has not maintained day to day production register describing the quality of ore produced under various grades. Most of the iron ore was purchased from its sister concern on placement of specific orders. Similarly the assessee also purchased iron ore from others placing specific orders. On procurement

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 35 of materials, there is no process of iron except segregating quality wise procurements."

In view of the above finding, the AO held that the activities of the assessee does not constitute ‘manufacture’ or ‘production’ and hence the assessee was not eligible for claiming deduction u/s 10B of the Act. 3.10.2 According to the assessee, it was engaged in the production or manufacture of an article or thing, as it was carrying on the production and ‘manufacture of iron ore and export of the same. The manufacturing and production process performed by the assessee is the change in chemical and physical composition of the iron ore. The iron ore purchased by the assessee is basic and very rudimentary element. In order to refine it and prepare it for export, certain chemical and physical procedures have to be undertaken. The ultimate customer would specify that the iron ore content should as per a particular specification. This specification will not be met when the new iron ore is mineral or purchased. Therefore, only with the change in chemical and physical composition of new iron ore, the same would be ready for export. This would involve a process of production and manufacture and therefore the assessee would fall within the provisions of sec 10B(2)(i) of the Act. 3.10.3 It was also submitted that in sec. 2(29BA) of the Act, ‘manufacture’ has been defined by Finance No.2Act, 2009 w.e.f 1/4/2009. This definition clearly contemplates that a new and distinct article or object with a different chemical composition or

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 36 integral structure would amount to manufacture of an article or thing. In the case on hand, this chemical and physical composition of new iron ore in transformed into an export and marketable commodity with the required acceptability of the customers. This process of ‘changing’ the original product with a change in chemical composition and physical changes would amount to manufacture. 3.10.4 We find that the co-ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10 (Supra) allowed the assessee’s claim for deduction u/s 10B of the Act following the decision of the ITAT, Panaji Bench in the case of Sesa Goa Ltd., Vs. ACIT in ITA No.72/PNJ/2012 for asst. year 2009-10 dated 8/3/2013, wherein the facts are similar those of the case on hand and the assessee was also engaged in the business of processing of iron ores. The relevant portion of the said order were reproduced in the order of the earlier year, which is again extracted here for useful reference:-

“45.8 Now coming back to the issue whether an assessee who is engaged in processing for upgrading and making the commodity fit for export and which is a 100% EOU approved by the competent authority can be said to have been engaged in manufacture or production of an article or thing. We have noted that this issue is duly covered by the decision of the Special Bench in the case of Madhu Jayanti International Ltd.(supra).

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 37 The relevant paragraph of this judgement has been reproduced by us in the preceding paras.

45.9 In this decision, Special Bench has exhaustively dealt with the provisions of section 1 OB, section 2(29BA) of the Income-tax Act, 1961 and section 2(r) of the Special Economic Zones Act, 2005; and the various decisions of the Supreme Court as well as the High Court which dealt with the issue and even the decision of Chowgule & CO (SC) as was referred by us in the preceding paras herein above. The Special Bench clearly noted in this decision, the decision of the Supreme Court in Tata Agencies' case 292 ITR 444 in which it was held blending and packing of tea amounts to processing and is not manufacturing or producing of an article or thing. In decision the Special Bench also noted that Kerala High Court in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 (Ker.) which took the view that 100% EOU engaged in processing cannot be denied exemption on the basis that the units are not engaged in manufacture or production. Moreover, on facts exactly similar to the facts of the assessee, in the case of Chowgule & Co. Pvt. Ltd. Vs Union Of India (1981) 1 SCC 653 AIR 1981 SC 014, Hon'ble Supreme Court were concerned with the

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 38 question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted 'manufacture' or 'processing' of ore for sale within the meaning of section 8(3)(b) and Rule 13 of Central Sales Tax Act, 1956. The Hon'ble Supreme Court, in construing the expression "processing's allowed the appeal of the assessee, in Chowgule & Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its "development or preparation for the market" it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. The Special Bench ultimately allowed exemption to the assessee on the similar issue where the assessee was engaged in the business of blending the tea for upgrading for marketing. Thus, in view of the decision of the Special Bench and other decisions discussed in the preceding paragraphs and that of Hon'ble Supreme Court in the case of Chowgule & Co. (supra) as well as definition of 'manufacture' as inserted w.e.f. 14.2009 by way of section 2(29AB) of the Income Tax Act as referred to by both the-parties, we hold that all the three 100% EOU engaged in processing so as to make crude ore and waste i.e. tailings usable or

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 39 marketable are entitled for exemption u/s 10B subject to the other conditions for exemption under section 10B are being fulfilled." 40. We have considered the rival submissions and are of the view that the decision rendered by the Panaji Bench in the case of assessee carrying on similar activity is squarely applicable to the present case and following the same, we hold that the assessee was engaged in manufacture or production of an article or thing and therefore fulfilled the conditions laid down in section 1OB(2)(ii) & (iii) of the Act. In view of the above, we do not find any merit in the appeal filed by the revenue.

3.10.5 In view of the clear finding rendered by the co-ordinate bench of this Tribunal in the assessee’s own case for the earlier asst. year 2009-10 (Supra) and since it is not disputed that the facts of the case in this year are not different, this should have been taken as a covered matter in favour of the assessee. 3.11.1 However, since the ld DR has brought on record another order of this Tribunal in another case which is stated to be engaged in similar line of business, M/s ILC Industries Ltd., (Supra), it is necessary and appropriate that we examine this decision also. 3.11.2 In the above decision in the case of ILC Industries Ltd., (Supra), the business of the assessee is mentioned as trading in ore. The activity chart and the processes involved are reproduced in the order, which appears to be similar to the line of business of the

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 40 assessee. In that case also, reliance was placed by the assessee on the decision of the ITAT, Panaji Bench in the case of Sesa Goa Ltd., (Supra). However, in the case of ILC Industries Ltd., the co-ordinate bench of this Tribunal had relied on a different set of judicial pronouncements to conclude that processing of iron ore does not constitute ‘manufacture’ or ‘production’. More particularly, the co- ordinate bench had relied on the following decisions of the Hon’ble Apex Court rendered in the context of the Central Excise Act to decide whether the activity of processing of iron ore constitutes ‘manufacture’ or ‘production’, namely, (i) Maruti Suzuki Ltd., Vs. CCE (2015) 32 GSTR 28 (SC); (ii) Satnam Overseas Ltd., Vs. CCE (2015) 32 GSTR 121 (SC) and (iii) Servo-Med Industries (P) Ltd., Vs. CCE (2015) 32 GSTR 404 (SC) 3.11.3 In the above decisions, the Hon’ble Apex Court laid down certain tests to decide whether a process is ‘manufacture’ or ‘process’. These tests, outlined in the decision in the case of ILC Industries Ltd., (Supra) are as under:- (i) Only that activity as a result of which a transformation has taken place viz., new different article emerges having a distinct name, character or use can only be said to be a manufacturing activity (Maruti Suzuki Ltd.,) (ii) The process would be treated as ‘manufacture’ only if a new product known to market comes into existence with the original product losing its original character (Satnam Overseas Ltd.,)

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 41 (iii) Process by which goods are made marketable cannot be called a manufacturing activity. No transformation takes place if the character and the end-use of the first product continues to be the same. The first test is, a different commercial commodity must come into existence and the original commodity, must cease to exist. The second test is the commodity which was already in existence will serve no purpose (Servo-Med Industries Ltd.,) 3.11.4 Applying the above legal position, the co-ordinate bench in the case of ILC Industries Ltd., (Supra), observed that after the process, the iron ore remains iron ore only and no new commercial product comes into existence. It also observed that it cannot be said that the original product, i.e, ROM has lost its identity and will serve no purpose and that there was no transformation due to the process. In view of these observations, the co-ordinate bench held that the assessee in the case, M/s ILC Industries Ltd., was not engaged in manufacturing activity to qualify for deduction u/s 10B of the Act. 3.12.1 We will now examine whether the aforesaid conclusions arrived at by the co-ordinate bench in the case of ILC Industries Ltd., (Supra) are supported by the facts of the case and the legal position of what constitutes ‘manufacture’ or ‘production’. Such an examination is necessary to understand and explain the apparent contradiction between the decision of the Tribunals in Sesa Goa Ltd., relied upon in the assessee’s case for asst,. year 2009-10 (Supra) and ILC Industries Ltd., (Supra) as to whether the activity of processing constitutes ‘manufacture’ or ‘production’. The apparent contradiction stems from the fact that the Tribunal in these two

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 42 decisions had relied on two different sets of judicial pronouncements. In the case of Sesa Goa Ltd., (Supra), the Tribunal relied upon judicial pronouncements which have been rendered in the context of the provisions of the Income-tax Act, 1961; whereas in the case of ILC Industries Ltd., (Supra), the Tribunal relied upon decisions rendered in the context of the Central Excise Act. 3.12.2 In a detailed order, the ITAT, Panaji, in the case of Sesa Goa Ltd., (Supra) had discussed the issue of what constitutes ‘manufacture’ by examining the various provisions of the Income-tax Act, 1961 like secs. 10A, 10B, 10AA and section 2 of the Special Economic Zone Act, 2005. The definition of ‘manufacture’ in the Act says that ‘manufacture’ shall have the same meaning as assigned to it clause(v) of section 2 of the special Economic Zones Act, 2005, which reads as under:- “‘Manufacture’ means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinct name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, re-making, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, aviculture and mining.’” This definition was adopted by the legislature in sec.10AA of the Act w.e.f 10/2/2006 as adopted by the special Economic Zones Act, 2005 by inserting Explanation 1(iii) to sec. 10AA of the Act which reads as under:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 43 “(iii) Manufacture shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005.” As per the said definition (Supra), process is included in manufacture . 3.12.3 Subsequently, by Finance Act, 2009 w.e.f 1/4/2009, clause (29BA) was inserted in sec. 2 of the Income-tax Act, 1961 defining the expression ‘manufacture’ as under:- “manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;”

3.12.4 Further in the decision of ITAT Panaji Bench in the cases of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra), the Tribunal had discussed various judicial pronouncements of the Hon’ble Courts. In the case of Ramacanta Velingkar Minerals (Supra), the Tribunal observed that the Hon’ble Apex Court in Chowgule & CO Pvt. Ltd. Vs. UOPI (1981) 1 SCC 653 on the question of whether blending of ore by means of ore handling plant constituted ‘manufacture’ or ‘processing of ore’ had held as under:-

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 44 “Where therefore any commodity is subjected to a process or treatment with a view to its "development or preparation for the mark, as. for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case; in one case processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of change is not material. It may be that camphor powder may -t be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Om Prakash Gupta Vs Commissioner of Commercial Taxes [16 STC 935 (Cal)]. What is necessary in order to characterize an operation as "processing" is that the commodity must as a result of the operation, experience some change. here, in

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 45 the present case, diverse quantities of ore processing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical composition demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical composition, because what is produced by such blending is ore of a different chemical and physical compositions. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to "processing' of ore within the meaning of Section 8(3)(b) and Rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities for such ore on the conveyor belt of the mechanical ore handling plant, but to our mind it is immaterial as to how the blending is done and what process is utilized for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 46 handling plant undergo any change in their physical and chemical composition is a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions. Thus the Hon’ble Supreme Court accepted that there is change in chemical compositions after processing of the iron ore in this case. From the said decision of the Apex Court, it is apparent that Hon’ble Apex Court held even blending of iron ore for the purpose of export involves change in the chemical and physical composition of iron ore. But if we look to the facts in the impugned case of the assessee, the assessee is not only blending iron ore but carrying out various processes as to make iron ore called crude ore useable to Ispat Industries. The activity of the units of the assessee for Amona and Chitradurga involved converting input into output consist of crushing (crude ore called ROM which appeared to be pieces of rocks as we noted during the course of hearing on the basis of sample shown to us) screening, washing, stacking, loading in barges, river transportation to the boat and export in ships. The finished product which comes out are called

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 47 lumps and fines which are used for Ispat Industries and brought by the foreign buyers. The finished product technically after processing had different name. As shown to us during the course of hearing we noted that the lumps and fines are entirely different from crude ore. During conversion of crude ore into lumps and fines, waste is generated which is called tailing and discharged into tailing pond. In Codli Unit these tailings which are in liquid form are converted into ultra fine. In our opinion as we noted from this physical sample also crude ore is entirely different from the lumps and fine in physical appearance used and chemical compositions even technically names are also different, similarly what comes as output from the input in codli unit that is also different in physical appearance and chemical composition. We do not agree with the learned D.R that there is not any change in physical and chemical composition of the output than the input as is being processed in all the three units.(If we go to section 2(29BA) inserted w.e.f. 1.4.2009, we find clause (b) of this section clearly states that bringing into existence of new and distinct object or article or thing with a different chemical composition or integral structure tantamount to manufacture. The Crude ore once

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 48 processed is made marketable and had a different chemical and physical composition than the ROM (Crude Ore) even though in common paralance both may be called iron ore. It is no more remains as crude ores. Tailing no more remains tailing but converted into a powder. In view of this clause and the decision of Supreme Court in the case of Chowgule & CO. (Supra), it can be held that the assessee is engaged in these units in manufacturing. Further, in CIT Vs N.C. Budharaja & Co. (1993) 204 ITR 412 (SC), Hon’ble Supreme Court further observed that the word "production" is much wider than the word "manufacture". It was said (page 423): "The word "production" has a wide connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to manufacture...

The word production or produce when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods."

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 49

3.12.5 The ITAT, Panaji Bench in the case of Ramacanta Velingkar Minerals (Supra) further observed that :-

“43.10 Therefore, Hon’ble Supreme Court, in construing the expression "processing" allowed the appeal of the assessee, in Chowgule & Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its "development or preparation for the market" it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. Hon’ble Supreme Court, in the said judgment, did not consider the expression "manufacture" since the question was decided only on the expression "processing". However, considering the judgment of the Bombay High Court in the case of Nilgiri Tea Co. [1959] 10 STC 500, Hon’ble Supreme Court observed that, for the purpose of producing a tea mixture of a different kind and quality according to a formula evolved by them, there *was plainly and indubitably processing of the different brands of tea, because these brands of tea experienced, as a result of a qualitative change, in that the tea mixture which came into existence was of a quality and flavor from the different brands of tea which went into the mixture.”

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 50

3.12.6 The ITAT, Panaji Bench in the case of Ramacanta Velingkar Minerals (Supra) also discussed the decision of the ITAT Kolkatta (S.B) in the case of Madhu Jayanti Internatinal Ltd., & Others in ITA No.1463/Kol/2007 wherein the question for consideration before the Special Bench was “Whether on the facts and in the circumstances of the case, the assessee’s who are in the business of blending and processing of Tea and export thereof, can be said to be ‘manufacturer/producer’ of the tea for the purpose of sec. 10A/10B of the IT Act, 1961?” The Special Bench of ITAT, Kolkata in the case of Madhu Jayanti International Ltd., (Supra), in its order has held that:- “We have examined and discussed the facts in the case of Madhu Jayanti International Ltd., and found that there is blending of the ore and consequently the assessee is eligible for exception u/s 10B of the Act as prayed for. 3.12.7 The ITAT, Panaji Bench in its order in Ramacanta Velingkar Minerals (Supra) after considering the aforesaid decision of the special bench of ITAT Kolkatta Bench (Supra), at para 44.1 of its order has held as under:- “44.1 From the reading of para 35 of the aforesaid judgment we noted that the Special Bench in this case clearly held that the assessee was engaged only in processing and was not engaged in the manufacture or production but had ultimately under para 36 it took the view in view of the fact that the definition of

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 51 manufacture u/s 2(r) of the SEZ Act, 2005 which is incorporated in section 10AA w.e.f. 10/02/2006 includes processing. Therefore, following the decision of Kerala High Court in the case of Girnar Industries and Tata Tea Ltd. (which was discussed by us in the preceding paragraphs) held that the assessee is entitled for exemption u/s 10B of the Act on account of blending of tea.”

At para 45.9 of its aforesaid order the ITAT Panaji Bench (Supra) observed and held as under:-

“45.9 In this decision, Special Bench has exhaustively dealt with the provisions of section 10B, section 2(29BA) of the Income-tax Act, 1961 and section 2(r) of the Special Economic Zones Act, 2005; and the various decisions of the Supreme Court as well as the High Court which dealt with the similar issue and even the decision of Chowgule & CO (SC) as was referred to by us in the preceding paras herein above. The Special Bench clearly noted in this decision, the decision of the Supreme Court in Tara Agencies case 292 ITR 444 in which it was held blending and packing of tea amounts to processing and is not manufacturing or producing of an article or thing. In this decision the Special Bench also noted that Kerala

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 52 High Court in the case of Tata Tea Ltd. Vs. ACIT 338 ITR 285 (Ker.) which took the view that 100% EOU engaged in processing cannot be denied exemption on the basis that the units are not engaged in manufacture or production. Moreover, on facts exactly similar to the facts of the assessee, in the case of Chowgule & Co. Pvt. Ltd. Vs Union Of India (1981) 1 SCC 653 AIR 1981 SC 014, Hon’ble Supreme Court were concerned with the question whether the blending of ore, whilst loading it in the ship by means of the mechanical ore handling plant, constituted manufacture or processing of ore for sale within the meaning of section 8(3)(b) and Rule 13 of Central Sales Tax Act, 1956. The Hon’ble Supreme Court, in construing the expression "processing" allowed the appeal of the assessee, in Chowgule & Co. Pvt. Ltd. (supra), holding, inter alia, that where any commodity is subjected to a process or treatment with a view to its "development or preparation for the market" it would amount to processing of the commodity within the meaning of Central Sales Tax Act, 1956. The Special Bench ultimately allowed exemption to the assessee on the similar issue where the assessee was engaged in the business of blending the tea for upgrading for marketing. Thus, in view of the decision of the Special Bench and other decisions

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 53 discussed in the preceding paragraphs and that of Hon’ble Supreme Court in the case of Chowgule & co (supra) as well as definition of manufacture as inserted w.e.f 1.4.2009 by way of section 2 (29AB) of the Income Tax Act as referred to by both the parties, we hold that all the three 100% EOU engaged in processing so as to make crude ore and waste i.e tailings usable or marketable are entitled for exemption u/s 10B subject to the other conditions for exemption under section 10B are being fulfilled.”

3.12.8 From the above consideration and detailed discussion in the decisions of the ITAT, Panaji Bench in the case of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra), and the decisions referred to therein; the following principles emerge:- (i) The term ‘manufacture’ also includes processing, (ii) Bringing into existence a new and distinct object with a different chemical composition is tantamount to ‘manufacture’, (iii) Iron ores with different chemical composition would amount to different products, though in common parlance they are called iron ore. 3.12.9 The fact in the case on hand are similar. The assessee has purchased a run of mine (‘ROM’) i.e, material extracted from mines on as is where is basis, which includes a lots of impurities such as mud, silica, sulphur, limestone, etc. The ROM is crude ore and practically of no use at the stage of as is where basis, unless the same

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 54 is processed and made suitable for use in the steel making industry. The ores extracted from the crust of earth (i.e, pit bottom mines) and not subjected to any processes like beneficiation are called ‘Run-of mines Ores’ (‘ROM’). This ROM is transported from the mines pithead to the beneficiation plant where it is further processed. The manufacturing process undertaken by the assessee in iron ore production in the run or mine (‘ROM”) is a very crude form with a lot of waste material called, impurities, accompanying the iron ore extracted. This very low grade iron ore cannot be used in metallurgical plants and requires to be upgraded to increase the iron content. The ROM ore is therefore transported to the beneficiation plant by Tippers/Trucks and fed into the processing plant feeder box and uniformly mixed with water and assimilated to from a uniform pulp. This mixture is fed to the high intensity magnetic separators, which separate the product which contains pure iron ore concentrate fines and the other unwanted material i.e gangue in the form of tailings. Thus, all the activities for ‘the manufacture of Iron Ore concentrate fines’ are undertaken by the assessee with the help of its concentrate plant comprising of High Intensity Wet Drum Magnetic Separators. The assessee thus manufactures iron ore concentrate fines by processing ROM through various processing activities conducted on this crude ore such as, crushing of rocks, screening, washing, stacking, loading in bogies , transportation and export of the processed iron ore. The raw material used in this work is commonly known as Run of Mine (“ROM”) and the finished product that emerges after the various processes carried out is called Iron Ore

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 55 Fines, which is exported by the assessee. In these circumstances as narrated above, the assessee has carried out manufacturing activities and is therefore entitled for deduction u/s 10B of the Act. The ITAT, Panaji Bench in the cases of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra) wherein the similar process carried out by Sesa Goa Ltd., and Ramacanta Velingkar Minerals was treated as manufacturing activity by the Tribunal. In the case on hand also, the assessee had undertaken the same process and therefore the co- ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10 (Supra) had treated the same as constituting manufacturing activity and held the assessee to be entitled to deduction u/s 10B of the Act. 3.12.10 In the light of the facts as laid out above and the legal position explained in ITAT Panaji Bench decision in the cases of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra), let us examine the various tests mentioned in the Tribunals decision in the case of ILC Industries Ltd., (Supra) as to what constitutes ‘manufacture’. (i) Only that activity as a result of which a transformation has taken place viz., new different article emerges having a distinct name, character or use can only be said to be a manufacturing activity (Maruti Suzuki Ltd.,) (ii) The process would be treated as ‘manufacture’ only if a new product known to market comes into existence with the original product losing its original character (Satnam Overseas Ltd.,)

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 56 (iii) Process by which goods are made marketable cannot be called a manufacturing activity. No transformation takes place if the character and the end-use of the first product continues to be the same. The first test is, a different commercial commodity must come into existence and the original commodity, must cease to exist. The second test is the commodity which was already in existence will serve no purpose (Servo-Med Industries Ltd.,)

3.12.11 In the case on hand, the iron ore extracted in the form of ‘ROM’ gets transformed into iron ore fines and therefore, there is a transformation. The original product ‘ROM’ is a crude form of iron ore with many impurities and after the processing, it loses its original character. Therefore, in our considered view, the tests listed out in the ILC Industries Ltd., case (Supra) stands satisfied. In that view of the matter, we are of the considered opinion that the decision of the ITAT, Panaji Bench rendered in the cases of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra) have discussed in details the facts related to the stages and processes adopted in the procuring of iron ore and also the legal position in this regard. We are therefore, of the view that the decisions rendered by Tribunal in the cases of Sesa Goa Ltd., (Supra) and Ramacanta Velingkar Minerals (Supra) applies on all fours to the assessee in the case on hand, and consequently respectfully following the decision of the co- ordinate bench of this Tribunal in the assessee’s own case for asst. year 2009-10, we hold that the activities carried out by the assessee

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 57 satisfies the conditions required for the grant of deduction u/s 10B of the Act. 4. In the result, the Revenue’s appeals for asst. year 2010-11 and 2011-12 are dismissed.

Assessee’s Cross-objection Nos.44/Bang/2016 for asst. year 2011- 12 5. Ground No.3 – Disallowance u/s 40(a)(ia) of the Act 5.1 Disallowance of Rs.9,32,360/- In the course of assessment proceedings, the AO observed that the assessee had made payments towards advertisement expenses, audit fees and land lease rent aggregating to Rs.9,32,360/- without deduction of tax at source thereon and therefore disallowed the aforesaid expenses u/s 40(a)(ia) of the Act. On appeal, the ld CIT(A) upheld the aforesaid disallowance on the ground that the assessee had not submitted any proper explanation for not deducting TDS on these payments, which are subject to TDS provisions. 5.2 Disallowance of Rs.55,29,200/- During assessment proceedings, the AO observed that the assessee had debited an amount of Rs.1,43,33,600/- towards port charges. It was submitted that these amounts were paid to the Chennai Port Trust and TDS provisions are not applicable in respect of the aforesaid payments since Chennai Port Trust had obtained an exemption certificate. On verification thereof, the AO found that the exemption certificate was valid only for six months from 1/4/2010 to 30/9/2010. The AO therefore proportionately disallowed an amount

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 58 of Rs.55,29,200/- u/s 40(a)(ia) of the Act. On appeal, the ld CIT(A) upheld the aforesaid disallowance made by the AO on the ground that the assessee had not furnished sufficient documentary evidence for establishing the dates of incurring such expenditure. 5.3.1 Before us, the ld AR of the assessee assailed both the above disallowances made u/s 40(a)(ia) of the Act. As regards the disallowance of Rs.9,32,360/-, it was submitted that an amount of Rs. 3 lakhs was paid as subscription to FIMI has been wrongly treated at advertisement expenses. It was also submitted that a provision for audit fees amounting to Rs.5 lakhs was created and at the time of creation thereof it was not know as to who will be the auditors and since the party was not identifiable, no TDS is applicable. Per contra, the ld DR supported the orders of the authorities below. 5.3.2 In support of the disallowance of port charges u/s 40(a)(ia) of the Act, it was submitted that the amount disallowed includes an amount of Rs.37,26,000/- pertaining to charges prior to 30/9/2010 and hence the disallowance of this amount was not tenable. Per contra, the ld DR supported the orders of the authorities below. 5.4 We have heard the rival contentions and perused and carefully considered the material on record. We find from record before us, that neither the facts related to the above disallowance u/s 40(i)(a) of the Act and the applicability of the TDS provisions to such expenditure been examined, verified and analyzed by the AO nor has the assesse submitted the full details, as has been observed by the ld CIT(A). In these circumstances, in the interest of justice, we deem it

ITA Nos.20/B/15 & 32/B/16 CO No.55/B/16 59 appropriate to set aside the orders of the authorities to remand the matter to the file of the AO, for examination, verification and to decide thereon as per law, by way of a speaking order, as to the applicability of the TDS provisions to the aforesaid expenditure after affording the assessee adequate opportunity of being heard in the matter and to file details/submissions in this regard, which shall be considered. We hold and direct accordingly. Consequently, grounds raised in the assessee’s cross-objection are allowed for statistical purposes. 6. In the result, Revenue’s appeals for asst. years 2010-11 and 2011-12 are dismissed and the assessee’s cross-objection for asst. year 2011-12 are allowed for statistical purposes.

Order pronounced in the open court on 19th January, 2018.

Sd/- Sd/- (SUNIL KUMAR YADAV) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore Dated : 19/1/2018 Vms Copy to :1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order

Sr. Private Secretary, ITAT, Bangalore.