DCIT, BANGALORE vs. SAINT GOBAIN CRYSTALS & DETECTORS (I) LTD.,, BANGALORE

Per INTURI RAMA RAO, AM :

This is an appeal filed by the revenue directed against the order of the CIT(A)-III, Bangalore, dated 28/02/2013 for the assessment year 2008-09.

ITA No.708/Bang/2013 Page 2 of 15 2. The revenue raised the following grounds of appeal: 1. “The order of the learned CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case The Ld. CIT(A) has erred in allowing the assessee's claim of deduction u/s 10B without considering the fact that the assessee is not manufacturing any new article or thing, rather assembling instruments and apparatus for measuring and detecting ionizing radiators and processing undertaken by the assessee would not bring anything new into existence. 3. On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that the assessee is entitled to claim deduction u/s 10B in respect of Unit-1 for A.Y. under reference i.e. A.Y. 2008-09 without appreciating the fact that as per the provisions of sub-section (1) of section 10B, the assessee is entitled to claim deduction only for a period of 10 consecutive assessment years beginning with the A.Y. relevant to the previous year in which the undertaking begins manufacture or production of articles or things or computer software. 4. On the facts and in the circumstances of the case the learned-CIT(A) erred in holding that for the purpose of accounting 10 consecutive assessment years, the assessment years for which the assessee had opted out of section 10B have to be excluded without considering the statutory position that assessee's option to not to claim deduction u/s 10B for certain assessment years will not alter the period of 10 consecutive assessment years beginning with the year of manufacture or production of articles or things or computer software. 5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing

ITA No.708/Bang/2013 Page 3 of 15 Officer may be restored. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 3. Briefly, facts of the case are that the respondent-assessee is a company engaged in the business of assembly of instruments and apparatus for measuring and detecting Ionising Radiators. Return of income for the assessment year 2008-09 was filed on 30/9/2008 and subsequently return of income was revised on 22/2/2010 at a total income of Rs.7,57,274/-. In the return of income, the respondent-assessee-company has claimed deduction under the provisions of sec.10B of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] of Rs.4,73,99,013/- in respect of units I and II based at Whitefield Main Road, Bangalore, which is 100% EOU. Said deduction was denied by the AO holding that the respondent-assessee-company is not engaged in the business of manufacturing any article or thing and also on the ground that the period of 10 consecutive years had expired as the manufacture or production of an article or thing was commenced on 1/10/1965. The contention of the respondent-assessee-company is that since no deduction was claimed in the assessment years 1997-98 and 1998-99 as the respondent-assessee-company opted out of the provisions of sec.10B deduction should be allowed for a period of 10 years commencing from the assessment year 1999-00 to 2008-09.

ITA No.708/Bang/2013 Page 4 of 15 4. Being aggrieved, respondent-assessee-company filed an appeal before the CIT(A) who vide impugned order held that the respondent-assessee-company was entitled to deduction under the provisions of sec.10B. While coming to this conclusion, the CIT(A), after considering the information furnished by the respondent-assessee-company on the nature of process carried out by it, had come to the conclusion that the respondent- assessee-company is engaged in the manufacturing or production of an article or thing and entitled for deduction. As regards reckoning the period of 10 consecutive years, the CIT(A) held that since the respondent-assessee-company opted out of the scheme of provisions of sec.10B in the assessment years 1997-98 and 1998-99, first year should be reckoned from the year 1999-00. He, accordingly, held that the respondent-assessee-company was entitled for deduction u/s 10B of the Act.

5.1 The learned Departmental Representative (DR) has invited our attention to the plain provisions of sec.10B of the Act. He submitted that the activities of the respondent-assessee-company are not in the nature of manufacture and the period of 10 consecutive years should be reckoned from the year in which manufacture or production of article or thing is commenced. As a result, respondent-assessee-company is not entitled for deduction

ITA No.708/Bang/2013 Page 5 of 15 under the provisions of sec.10B of the Act. In this connection, he has relied on the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. DSL Software Ltd. (18 taxmann.com 151)(Kar).

5.2 On the other hand, learned AR of the assessee submitted that the issue whether the activity of the respondent-assessee- company comes within the meaning of ‘manufacture’ is covered by the decision of the Hon’ble High Court of Karnataka in the assessee’s own case reported in 57 Taxmann.com 152.

5.3 As regards reckoning of period of 10 consecutive years, learned AR of the assessee submitted that since respondent- assessee-company opted out of provisions of sec.10B for two years, first year should be reckoned from 1999-2000 onwards. Accordingly, he submitted that the respondent-assessee-company is entitled for deduction even for assessment year 2008-09.

ITA No.708/Bang/2013 Page 6 of 15 instruments and apparatus for measuring and detecting Ionising Radiators, is a manufacturing activity or not, the Hon’ble High Court of Karnataka in the assessee’s own case held as under: “7. The word ‘manufacture’ has been subject-matter of various decisions. After reviewing those decisions, this court, in the case of CIT vs. Murudeshwar Décor Ltd. (2014) 227 Taxman 29 and connected matters, disposed on 1/7/2014, at para.16, has held as under: ‘From the afore stated judgments, it follows that etymologically the word 'manufacture' properly construed would cover the transformation. It is the transformation of a matter into something else. That something else is a question of degree. Whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. The manufacture is the end result of one or more processes through which the original commodities are made to pass. The process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected that the manufactured product emerges. The nature and extent of processing may vary from one case to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. The test for determining whether the manufacture can be said to have been taken place is whether the commodity, which is subjected to process can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity. The word "manufacture" implies a change but every change is not manufacture. The manufacture is a transformation of an article which is commercially different from the one which is conferred. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point is in manufacture, something is brought into existence

ITA No.708/Bang/2013 Page 7 of 15 which is different from that which originally existed, in the sense that the thing produced is by itself a commercially different commodity. The moment there is transformation,. a new commodity commercially known as distinct and separate commodity having its own character, use and name, whether it be the result of one process or several processes "manufacture" takes place and duty is attracted.’ 8. From the aforesaid material, it is clear, the finished product which is sold by the assessee, is different from the material which are procured for making such a finished product. A series of processes are carried out and a new product is arrived. After going through the said process, the product which comes under that process is different from that which originally existed, in the sense that the thing produced is by itself a commercially different commodity. The moment there is transformation, a new commodity commercially known as distinct and separate commodity having its own character, use and name, whether it be the result of one process or several processes, manufacture takes places and duty is attracted. Therefore, the Tribunal was justified in holding that the process undertaken by the assessee constitutes manufacture and that they are entitled to the benefit of Section 80(ia) of the Act. Accordingly, the substantial question of law is answered in favour of the assessee and against the Revenue. There is no merit in these appeals.” Following the decision of the Hon'ble jurisdictional High Court in the assessee’s own case cited supra, we hold that the activity of the respondent-assessee-company is in the nature of manufacture or production of an article or thing.

ITA No.708/Bang/2013 Page 8 of 15 deduction u/s 10B. The relevant provisions of sec.10B are as under: SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED HUNDRED PER CENT.EXPORT- ORIENTED UNDERTAKINGS 10B (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent. of the profits and gains derived by an undertaking from the export of such articles or things or computer software: Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2011] and subsequent years. Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139. (2) This section applies to any undertaking which fulfils all the following conditions, namely :- (i) it manufactures or produces any articles or things or computer software ;

ITA No.708/Bang/2013 Page 9 of 15 (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 33B, in the circumstances and within the period specified in that section ; (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 1 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. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.— For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating pay-ments and dealings in foreign exchange. Explanation 2.— The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the

ITA No.708/Bang/2013 Page 10 of 15 total turnover of the business carried on by the undertaking. (5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the asses-see of the previous year relevant to the assessment year immediately succeeding the last of the relevant assess-ment years 5ending before the 1st day of April 2001, or of any previous year, relevant to any subsequent assessment year,- (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub- section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub- section (1) of section 36, as the case may be, shall not apply in relation to any such allowances or deduction. (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set-off where such loss relates to any of the relevant assessment years ; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section

ITA No.708/Bang/2013 Page 11 of 15 80-IA or section 80-IB in relation to the profits and gains of the undertaking ; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place ; and (b) the provisions of this section, shall as far as may be apply to the amalgamated or resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or the demerger had not taken place. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. Explanation 2.— For the purposes of this section,- (i) "computer software" means,- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device ; or

ITA No.708/Bang/2013 Page 12 of 15 (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means ; (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made there-under or any other corresponding law for the time being in force ; (iii) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. (iv) "hundred per cent. export-oriented undertaking" means an undertaking which has been approved as a hun-dred per cent. export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act ; (v) "relevant assessment years" means any assessment year falling within a period of ten consecutive assess-ment years, referred to in this section. Explanation 3.— For the removal of doubts, it is hereby declared that the profits and gains derived from on site develop-ment of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

ITA No.708/Bang/2013 Page 13 of 15 Explanation 4.— For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semiprecious stones.

It may be mentioned that the provisions of sec.10B conferred tax holiday for a period of 5 years initially. Thereafter, the provisions were amended w.e.f. 1/4/1999 and tax holiday period was extended to 10 years and it was also clarified that the units which were entitled for deduction u/s 10B earlier can also claim the benefit of deduction u/s 10B for unexpired period of 10 consecutive assessment years from the commencement of production or manufacture of an article or thing. In the instant case, the respondent-assessee-company had commenced production on 1/10/1996 i.e. in the assessment year 1997-98. It was the claim of the respondent-assessee-company that in terms of sub-sec.(7) of sec.10B, respondent-assessee-company had opted out of the provisions of sec.10B for assessment years 1997-98 and 1998-99 and therefore, the period of 10 consecutive years should be reckoned from assessment year 1999-00 onwards. This contention of the respondent-assessee-company cannot be accepted having regard to the plain provisions of sec.10B, which clearly lay down that period of 10 consecutive years to be reckoned from the assessment year in which production or manufacture of an article or thing was commenced. Same reasoning was followed by the Hon'ble jurisdictional High Court in the case of CIT vs. DSL Software Ltd. (18 taxmann.com 151)(Kar) and Sami Labs (334 ITR 157). The relevant para of the

ITA No.708/Bang/2013 Page 14 of 15 judgment in the case of DSL Software Ltd. (supra) is reproduced below: “9. In the instant case, the assessee has commenced production in the year 1993-94. He enjoyed the benefit of 5 years from 1993-94 to 1997- 98. The amended provision came into force on 01 .04.1999. He is entitled to the tax holiday under the amended provision i.e. from 1993-94 to 2002-03. He claimed benefit from 1999-2000, 2000-01 and 2001- 02. It is for the period 2001-02, the benefit is denied. The said denial of the benefit runs counter to the spirit of Section 10B and it would negate the object with which the amended provision was brought in. The assessee is entitled to the benefit of extension from 5 years to 10 years tax holiday as provided under the amended provision for 10 consecutive years from the date of commencement of production. In that view of the matter, the order passed by the Tribunal as well as the First Appellate Authority is strictly in accordance with law and do net suffer from any legal infirmity, which calls for interference. No substantial question of law arises for consideration in this appeal.”

Respectfully following the judgment of the Hon'ble jurisdictional High Court in the cases cited supra and plain provisions of sec.10B, we hold that the period of 10 consecutive years should be reckoned from the assessment year 1997-98 i.e. from the year of commencement of production or manufacture of an article or thing upto the assessment year 2006-07. In the present appeal, we are concerned with the assessment year 2008-09, therefore, the respondent-assessee-company is not entitled for deduction u/s 10B of the Act as the period of 10 consecutive years expired with assessment year 2006-07.

ITA No.708/Bang/2013 Page 15 of 15 8. In the result, the appeal filed by the revenue is allowed.

Order pronounced in the open court on 11th May, 2016

sd/- sd/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 11/05/2016 srinivasulu, sps

Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore